A fairly in-line hold adjusted quarter but the lack of a special dividend is a disappointment.  



We’re not sure we’ve seen a special dividend more telegraphed than this one.  The problem is…there was none.  Not sure if the Board nixed it at the last minute and/or management decided to hoard some cash for the prospect of future development.  Either way, the lack of a special dividend will likely be a disappointment to the fast money in the stock for that very reason.


In any other sector, WYNN’s results would look fantastic.  However, the downside of operating in Macau is that investor expectations are usually at high altitude.  Relative to those expectations, Q3 results were a little lackluster.  Las Vegas was in-line after adjusting for hold but Macau missed our estimate because of the cost side. 


Management was bullish about current trends in Macau which told us essentially what we already knew:  Golden Week was terrific and October is tracking up 34-39% over last year.  While the US$73 million in EBITDA through the first 18 days of October (as disclosed on the call) sounds great, that would project out to $325 million in EBITDA for Q4, essentially in-line with our projection.  One cannot straight line the busiest part of the quarter over the full quarter.



Here are the details of the quarter:



Net revenue came in $4MM higher than our estimate but EBITDA was $11MM light due to higher junket commissions and higher fixed expenses.  Higher than theoretical hold on the VIP side of the business and strong hold on Mass benefited EBITDA by roughly $14MM. 

  • Net VIP table win was $4MM higher than we estimated
    • Direct play was 10% vs. our estimate of 8% but hold was only 1bps lower than we estimated, resulting in gross table win that was $19MM above our estimate.  However, that was offset by a rebate rate that was 3bps higher – 93bps or 31.5% of win.
    • We estimate that all junket commissions & rebates were 42.8% compared to our estimate of 41.2%.  However, we won’t know for sure until Wynn Macau reports.
    • If we used theoretical hold of 2.85%, then gross win would have been $31MM lower and EBITDA would have been $5.4MM lower
  • Mass table win was $1MM lower than we estimated
    • Drop was 10% less than we estimated but the win % was 2% better.  Wynn’s mass hold during the last 3 quarters has been trending at 27.8% - noticeably higher than 23.6% in 2010.  The last 4 quarters have averaged 27.4% hold, so this could be the new norm for their business.  However, if we use a 7 quarter average of 25.3%, revenues would have been $17MM lower and EBITDA would have been about $9MM lower.
  • Slot win was $1MM higher than we estimated
    • Slot handle was disappointing - flat YoY - but a 1% improvement in hold % made up the difference.  It’s probably not a stretch to say that at roughly a $700/win per device, we are seeing some saturation here.
  • Net non-gaming revenue was in-line with our estimate with higher gross revenues in room, retail and other, offset by higher promotional expenses
  • We estimate that fixed expenses, totaling $101MM, were $6MM higher than our estimate


Las Vegas


Revenues and EBITDA came in below our estimate by 6% and 14% respectively due to low hold, higher promotional spending, and lower F&B spend which was somewhat offset by better expense control

  • Net casino revenues were $13MM below our estimate
    • Table drop grew an impressive 15% YoY, much better than our estimate of flat table drop, but hold was only 18.3% vs. our estimate of 24%
      • If we use a normalized hold rate of 23.5% (the past 7 quarter average), revenues would have been $32MM better and EBITDA would have been about $16MM better.
  • Slot win was $1MM better than we estimated
    • Slot handle on the other hand wasn’t so impressive – decreasing 2.4% YoY vs. our estimate of 5.0% growth.  A better win % more than made up the difference though. Wynn’s win % has been increasing over the last few years largely due to the removal of the video poker machines which had payout ratios of about 99% and what looks like some recent yield management.
  • Total gaming discounts and promotions totaled 17.4% of gross casino win- higher than the 15.9% discount rate from 2010 and the 15.9% rate last quarter


Cheesecake Factory posted poor 3Q earnings as commodity costs hit the bottom line but – perhaps less transient – the top-line also missed.


CAKE posted a disappointing number after the market close, with EPS coming in at $0.36 versus expectations of $0.38.  Total same-store sales came in at 0.8% (including 40 basis points of negative impact from Hurricane Irene).  Cost of sales, restaurant margins, and operating margins were all the wrong side of expectations by 10 basis points in each case.  Dairy costs, which management claimed earlier in the year would be favorable in the fourth quarter, were a significant headwind in the third quarter and overall food costs are going to be more of a headwind than expected – by ~$1.00 – in the fourth quarter.


Here are our Top 10 Takeaways from the CAKE quarter:

  1. The concept’s top-line struggled through the quarter as price was taken and gas prices were elevated.  Consumer confidence is not, according to the company, improving quickly. 
  2. There was roughly 1.6% of pricing on the menu which implies, given the comp, -0.8% of negative mix shift in the quarter.  Management expects the mix drag on the top-line to continue until incidence of alcoholic and non-alcoholic beverages increase.
  3. On the brighter side, the company’s new units perform – from a sales perspective – above the average of the rest of the store base.  Additionally, the new store openings have been quite geographically diverse: California, Texas, Florida, and the Northeast.
  4. California, Texas, and Florida were highlighted for ongoing strength.  It came as a slight surprise to us given the decline in California Retail Sales and Use Tax Receipts in September. 
  5. Margins were a disappointment this quarter with commodity costs the most obvious culprit.  As management put it, “normalized for commodity cost, margins are healthy, as we effectively leverage costs across our P&L.
  6. Food costs remain a wild card for the fourth quarter.  Dairy prices have been extremely volatile and the company seems less confident on this line than they were prior.  Cheese prices will be worth watching in our weekly commodity monitor (chart below).
  7. From a top-line compare perspective, the fourth quarter is easy (versus a 0.9% rather than a 2.8% in 3Q). 
  8. The sentiment on the name is extremely bullish given the less-than-perfect fundaments and we believe that there is plenty of room – and reason – for downgrades to follow this poor quarter (second chart below).
  9. The company’s guidance won’t go far towards halting any downgrades in their tracks.  The company guided to $1.80-1.90 in EPS versus the Street at $1.87 and 1.5% to 2.5% comps versus the Street at 2.3%. 
  10. Strong Knapp figures didn’t seem to show in CAKE’s results.  While the stock has been beaten up recently, we remain negative on the name

CAKE: STILL A STRUGGLE - cake quadrant


CAKE: STILL A STRUGGLE - cake ss sentiment



Howard Penney

Managing Director


Rory Green





TODAY’S S&P 500 SET-UP - October 20, 2011


Exotic TAILS notwithstanding (18 tigers and 8 bears on the loose in Ohio yesterday), we know this market’s long-term TAIL is broken (1266) – so, all we have to do now is continue to manage risk around the immediate (TRADE) to intermediate-term (TREND) range.  As we look at today’s set up for the S&P 500, the range is 20 points or -0.73% downside to 1201 and 0.92% upside to 1221




From an immediate-term TRADE perspective, today’s selloff doesn’t change the fact that all 9 sectors (and the SP500 itself) remain bullish. This is healthy until it isn’t. A close below 1201 tomorrow would change this setup. Holding above it would be bullish.


Another improving TREND (intermediate-term) is that 4 of 9 Sectors are now bullish on that duration: Consumer Discretionary (XLY), Utilities (XLK), Tech (XLK), and Consumer Staples (XLP). We like those Sectors in that order. Consumer Discretionary will be the most direct beneficiary of a Strong Dollar as it will continue to “Deflate The Inflation.”









  • ADVANCE/DECLINE LINE: -1354 (-3428) 
  • VOLUME: NYSE 964.04 (-11.17%)
  • VIX:  34.44 +9.13% YTD PERFORMANCE: +94.03%
  • SPX PUT/CALL RATIO: 1.78 from 1.64 (+8.80%)




  • TED SPREAD: 39.13
  • 3-MONTH T-BILL YIELD: 0.03%
  • 10-Year: 2.18 from 2.19    
  • YIELD CURVE: 1.90 from 1.91


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30 a.m.: Jobless claims, est. 400k, prior 404k
  • 9:45 a.m.: Bloomberg Consumer Comfort, prior (-50.8)
  • 10 a.m.: Leading indicators, est. 0.2%, prior (-17.5)
  • 10 a.m.: Existing home sales, est. 4.91m, down 2.5%
  • 10 a.m.: Freddie Mac mortgage rates
  • 10:15 a.m.: Fed’s Bullard speaks in St. Louis
  • 10:30 a.m.: EIA Natural Gas storage
  • Noon: Fed’s Lockhart moderates panel on economy in Atlanta
  • 12:50 p.m.: Fed’s Pianalto speaks in Toledo, Ohio
  • 1 p.m.: U.S. to sell $7b 30-yr TIPS (reopen)
  • 2 p.m.: Treasury’s Brainard testifies to U.S. Senate committee
  • 6 p.m.: Fed’s Tarullo speaks at Columbia in NYC
  • 7:45 p.m.: Fed’s Kocherlakota speaks on economic education in Minneapolis


  • Yahoo! isn’t necessarily up for sale, co-founder Jerry Yang said; Alibaba CEO reiterates he’s interested in buying the company
  • Groupon said to be in talks to sell shares in IPO valuing co. at ~$12b
  • Sales of existing U.S. homes probably declined 2.5% to 4.91m annual rate in Sept., economists’ forecast ahead of today’s report
  • SEC said to be trying to determine if SAC Capital used insider information to profit from J&J’s 2009 takeover of Cougar Biotechnology, WSJ says

COMMODITY/GROWTH EXPECTATION                                             


COMMODITIES – we’ve called for the Correlation Crash to continue and that’s plainly obvious now with Gold chasing Copper (albeit with a lower beta); both remain broken; Copper down -2.9% this morning is immediate-term TRADE oversold, but has moved back into the down -30% since July zone; not good – neither is Gold’s TREND resistance ($1685) fortifying itself





  • Pamela Anderson Champions Palladium as Gold Prices Soar: Retail
  • Iron’s Worst Rout in 15 Months May Deepen as China Slows
  • Silver Bear Market Seen Ending on Europe Crisis: Commodities
  • China Love of U.S. Cherries Fuels Cool-Cargo Boom: Freight
  • Gold Falls to Two-Week Low as Gains in the Dollar Curb Demand
  • EU Targets Commodities, High-Frequency Trading in Market Law
  • Coal Gridlock Heralds Two-Year High Asia Premium: Energy Markets
  • Zambia Investors Say Copper Boom to Extend as Sata No Castro
  • Copper Drops for a Fourth Day on European Debt-Crisis Concern
  • Chinese Aluminum Supply Jump 30% in 3 Weeks, Signaling Slump
  • Oil Drops a Second Day on Europe Outlook; Brent Premium Widens
  • Rio Tinto Makes $567 Million Offer for Hathor to Trump Cameco
  • Gold Prices May Extend Losses on Bear Flag: Technical Analysis
  • EU Seeks Curbs on Commodity Derivatives, High-Frequency Trading
  • Freeport Says Grasberg Mine Operating at Two-Thirds Capacity
  • Agnico Plunges After Halting Canadian Gold Mine on Flooding
  • Commodities trading suffers as French banks curb credit
  • Thailand, Indonesia ‘Closely Monitoring’ Rubber Decline
  • Oil Rebounds on Speculation EU Agreement Will Help Fight Crisis








RUSSIA – consistently flashing negative divergences vs the focus European markets (DAX, CAC, Greece, etc) this week; this tells me that A) I’m right on the USD TREND and B) right on Oil remaining a bearish TAIL/TREND; Petrodollars drive the RTSI and its crashing – down -34% since May.






ASIA – the Hang Seng was down -1.8% again last night (China down -1.9% testing new lows) and the move was consequential as the only remaining line of support (18215) was snapped again on the downside.  As the world focuses on 1 thing (Europe) you tend to get paid to focus on everything else that doesn’t cease to exist – Asian Growth Slowing is a big one.








The Hedgeye Macro Team

Howard Penney

Managing Director


In September, YoY CPI growth for Food at Home increased by 30 basis points versus August to 6.3%.  CPI for Food Away from Home fell to 2.6% in September from 2.7% the month prior.


Food costs are now the key line item in Americans’ P&L’s according to WMT’s commentary during its earnings call two months ago.  BLS data released this morning detailing the Consumer Price Index in September suggests that the spread between food at home inflation and food away from home inflation grew wider for a tenth consecutive month. 


As we have written before, as long as grocery inflation continues to outstrip price increases in restaurants, it should be a positive for comparable sales trends at restaurant chains.  Whether or not restaurant margins can withstand the pressure or not, however, remains to be seen. 


The Knapp Track data, as we wrote about on Monday morning, suggests that the third calendar quarter finished strongly for casual dining.  The CPI data released today provides another bullish data point for the restaurant space with respect to traffic; to the extent that the more severe inflation in the grocery aisle relative to the restaurant dissuades people from eating at home, it is a positive for restaurants’ guest counts.  However, it is important to note that effective food prices remain high for many restaurant companies.  Despite spot prices for most foodstuffs declining recently, contracts and inventories need to be worked through in order for companies’ margins to derive any benefit, or relief, as inflation subsides.




Howard Penney

Managing Director


Rory Green



An in-line quarter negatively impacted by mix




  • GEG Adjusted EBITDA of HK$1.793BN
  • Galaxy Macau Adjusted EBITDA of HK$973MM and revenue of $6,390MM
    • VIP RC: HK$163BN; win: $4.9BN
    • Mass drop: HK$5BN; win: HK$1BN
    • Slots handle: HK$4BN; win: $262MM
    • US GAAP Margin of 23%
    • 2,100 rooms open in 3Q, 91% occupancy
    • "All 2,200 rooms and Macau’s first mega 3D Cineplex to open in late Q4 2011"
  • Starworld Adjusted EBITDA of HK$779MM and HK$6.4BN of revenue
    • VIP RC: HK$180BN; win: HK$5.9MM
    • Mass drop: HK$2.3BN; win: HK$433MM
    • Slot handle: HK$917MM; win: HK$58MM 
    • US GAAP margin 21%
  • City Club Adjusted EBITDA of HK$32MM
  • Construction material Adjusted EBITDA of HK$117MM
  • Balance sheet: Cash of HK$7BN 



  • Galaxy Macau
    • Opened 3 new VIP rooms at Galaxy Macau in the quarter for a total of 10 now
    • Wave pool had 2,000 visits per day in August
    • Hold challenges impacted their results by HK$60MM (bad mix) - would have been $1,030MM
  • Starworld also had an unfavorable mix of RC vs RevShare business which also negatively impacted their business but didn't quantify it.
  • City Clubs's result decline was a result of hold challenges and YoY volume declines


  • 95% gaming and 5% non-gaming revenue split at both Starworld & GM
  • Will likely make an announcement sooner rather than later on PH2 of GM
  • GM's hold was fine but the mix was unfavorable 
  • Added a slot marketing team, new signage around the property at Starworld are some of their new changes that are driving mass
  • Mass business is growing at Galaxy Macau. Their brand awareness is growing. As their dealers gain experience, their Mass hold has increased.  Busing program is successful. 
    • Growing their database is important to grow the Mass business at GM - it just takes time to ramp. Shuttle bus and day tripper business are growing. 
  • The addition to fixed cost isn't as high as you would think as the additional hotel rooms come online; it's mostly just variable costs


MCD will announce September sales, along with 3Q11 results, before the market opens on Friday, October 21st.


I suspect that there will not much to complain about when MCD reports 3Q11 numbers on Friday.  Over the past three months, 3Q11 consensus estimates have declined by 0.4% and now stand at $1.42.  I suspect that the $0.06-$0.07 of currency benefit the company guided to at the start of the quarter is likely now only $0.01-$0.02.  Given all that and any non-operating items, MCD should come close to hitting consensus; but there not a lot of wiggle room.  I put it at $1.41 for the quarter.


From a MACRO stand point MCD is facing some issues.  In particular, beef prices continue to trade higher and consumer confidence and retail sales numbers in Europe are sluggish. 


Recapping the quarter to date sales trends, we know July was a strong month, beating expectations globally.  August, on the other hand, was not a very strong month for MCD sales, largely due to timing issues and one-time items in Europe (Ramadan) and APMEA (power outages in Japan), respectively.  Global comps came in at +3.5%, below the street’s +4.7% estimate.  U.S. comps of +3.9% were only 10 bps shy of expectations, but Europe comps came in +2.7% versus +5.5% expectations.  APMEA missed by the widest margin, -0.3% versus the street at +3.9%. Weak sales in Japan weighed on the overall results.


As important as the reported number in the quarter, sales trends in September and October will likely have a bigger impact on market psychology.  On that front, I suspect that MCD will have sequentially better month in September. 


Compared to September 2010, September 2011 had one less Wednesday and one additional Friday.  As a result, I would not anticipate any major calendar shift.  Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for historical calendar and trading day impacts. 


U.S. - facing a compare of +5.7% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world). 


GOOD: A print above 5.0% would be received as a good result, as it implies acceleration in two-year average trends.  Despite the slight miss in August, two-year average trends improved on a calendar-adjusted basis.  It will be interesting to see if McDonald’s can continue to drive trends higher in September.  I am expecting a strong month.


NEUTRAL:  A print between 3.0% and 5.0% would be received as a neutral result by investors given that the mid-point of this range implies two-year average trends, on a calendar-adjusted basis, that are relatively in line with trends in August. 


BAD: Same-restaurant sales below 3.0% would imply a sequential slowdown in two-year average trends and could raise significant doubt about the ability of MCD to maintain its recent impressive top-line performance. 


EUROPE - facing a compare of +4.9% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world).  Europe was a disappointment in August but the timing of Ramadan was largely responsible for the sales shortfall.  As a result, investors are expecting to see this trend reverse in September.


GOOD: A print of 5% or higher would be received as a good result for Europe as it would imply a nearly 200 bp acceleration in two-year average trends after the 190 bp decline (calendar-adjusted basis) in August.  If MCD can reverse last month’s slowdown, investors will more likely be convinced that the slowdown in August was indeed a timing issue.


NEUTRAL: A result between 3% and 5% would be received as a neutral result because it would imply two-year average trends that are improved from the weaker-than-expected trends in August 


BAD:  A result below 3% would imply two-year average trends that are only slightly better than or level with the disappointing two-year average trends seen in August. 



APMEA - facing a difficult compare of +6.2% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world).  As in Europe, MCD faced some one-time issues in APMEA during August as power outages negatively impacted results in Japan.


GOOD: A print of 6% or higher would be received as a good result as it would imply a sequential acceleration of nearly 200 bps in two-year average trends, thereby showing a reversal of the slowdown during August.  Again, this would help to convince investors that the power outages in Japan were largely to blame for the significant falloff in trends in August.


NEUTRAL: A result between 4% and 6% would be received as a neutral result because it would imply two-year average trends that have accelerated from the worse-than-expected trends in August. 


BAD: Same-restaurant sales in APMEA below 4% would be received as a bad result because it would imply only a slight uptick or level trends with what was a disappointing month.



MCD - A LOOK AHEAD - mcdss


MCD - A LOOK AHEAD - mcdbs


Howard Penney

Managing Director


Rory Green



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