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In-line wasn't good enough for Q3 but Q4 off to strong start


"Our forward booking trends remain strong both for our consumer retail segments and corporate events.”


Jim Murren, MGM Resorts International Chairman and CEO




  • Continue to see consistency in this recovery
  • 13% RevPAR growth beat their forecast for 10% RevPAR growth - outperformance due to better results in FIT and Leisure segments
  • Convention business is particularly strong.  September was one of their best booking months ever. 
  • October was the most profitable month that they have ever had in Las Vegas and a record month in Macau
  • Cotai: Resort would have 1600 rooms and suites, 2500 slot machines and 500 tables.  No specific date when they expect to receive their land grant issuance. 
  • US Congress is considering efforts to legalize online gaming.  They announced a joint agreement with Bwin.Party and Boyd gaming.  The poker business will be about scale and this opportunity will be the best one to capitalize on any legalization of online poker.
  • M Life continues to gain traction.  Active customers in their database increased 12% YoY this quarter.  Have also seen tier advancement - specifically a 13% increase in their platinum players and a 7% increase in their NOIR players (highest tier). 
  • Have 17 projects at MGM Hospitality at various stages of development.  First one is opening in a few months.  Just announced a development in Mumbai. 
  • Low hold impacted their CF by $16MM- Aria held high, helping them by $5MM.  Net net their EBITDA would have been $255MM if they held at the mid-point of 'normal'.
  • Table game volume ex Strip was up 1-2%
  • Net RevPOR grew a little more than 3% in the Q.  Retail room rates experienced the best increase - up double digits. 
  • Late November/early Dec opening of their VIP in-house gaming area in Macau
  • Spent $78MM of capex (excluding $14MM in MGM China)
  • Expect to spend $275MM in capex in 2011 - completion of room remodel in Bellagio
  • Luxor and Excalibur are in the process of opening 8 new F&B - 3rd party operated partners
  • City Center:
    • Aria: Hotel revenues were up 20%, F+B revs increased 11%, table game volume ex bacc were up 6% and slot was up 24% YoY
    • 2012 and beyond booking pace continues to strengthen
    • Vdara: $131 RevPAR
    • Crystals: SS sales up 27% YoY - 2nd highest sales per SQFT. 86% is under lease. DG is scheduled to open early next year
    • 374 units are leased for residential inventory
    • Feb 4, 2013 trial date vs. Perini
    • $100MM of pre-payments to the credit facility in September and October
  • Have a lot of events in the 4Q which should help them - have 2 new nightclubs openings.  Feel comfortable that RevPAR will increase 10% in the 4Q.  With best gains in FIT.
  • Expect to see an acceleration of CF growth in 2012. 



  • 2012: 1Q is a tough convention comp. They expect FY 12' to be at or slightly above where they are in 2011. Pricing is up but volume is down in 1Q.
  • Bellagio is having a tremendous 4Q for RevPAR
  • Aria - up 40% for 2012 Convention Bookings
  • MGM Macau - Since the completion of their construction of the new lounge, they have seen 12-13% improvements per square foot yields.  Still seeing very strong growth in VIP revenues which should continue as they bring on new direct VIP area. 
  • EBITDA impact for rooms out of service at the Bellagio? 
    • At least $1MM of CF impact from 300 rooms out of service
    • Selling rate for the renovated rooms are $30/night higher
    • Renovations for 2,570 rooms
    • $70MM Capex project
  • MGM Grand remodel program is starting now: $160MM remodel program - 4,300 rooms.  700 rooms out of service at any point in time.  Expect to get a $10-20 increase in ADR.
  • MGM Grand benefits during the summer because of their pool.  Also had a lot of events at the property.
  • FIT numbers are still materially lower than peak and a little below last year.  60% flowthrough is pretty good. If they held better, the flowthrough would have been better.
  • M Life should also help them going forward
  • 2012 will be even better from an event standpoint than 2011
  • Highest priority is for MGM to improve the balance sheet. The refinance gives them maximum flexibility - to issue $300MM more of secured paper (removed a cumbersome covenant).  High priority on lowering their cost of capital. Refinancing Macau's credit facility is also a top priority.
    • At a high level - every point of interest savings is $100MM of FCF to them 
    • Will save a lot when they redo their credit facility next Q
    • Will retire the NY notes which are at 13%
    • Expect to see a dramatic reduction on their interest
  • Last year's hold % for Aria was 23% and this year it was 27%
  • MGM China dividend?
    • Will be debt free in that operation this quarter.  Clearly an objective of the board to balance growth and shareholder returns at MGM China.  Will have numerous opportunities to dividend back money to shareholders and to investment in Macau.
  • Flow through on mid-single digit range revenue growth.  Objective is to keep their costs flatish in 2012. 
  • Decrease in baccarat volumes in the quarter?
    • Just a matter of when their players come in. The tone of that travel is strong. Think it was just a timing issue
    • Expect strong baccarat play in 4Q and 1Q12'
  • October strong Vegas performance was broadly based: strong casino play, Bellagio had strong revenue growth
  • No comment on Cotai costs.  Given the size of the property, just look at the recent comps like Galaxy.
  • Shovel ready in Cotai?
    • Ready to do site work right away as long as they get permission
  • Convention mix in 3Q was 12% and will be about 14% in 4Q; YE at 14.5%; 15% in 2012; while Aria's convention mix will be about 16.5%.
  • Bellagio is up double digits even on unrenovated rooms at Bellagio
  • Leisure mix was around 40% and expect it to stay around there in 2012.  Trying to squeeze the gap between FIT and Leisure.  Commissions on leisure still the same.
  • Just completed planning the Luxor, Excalibur, and NY - but mostly in the public areas for those properties
  • Post MGM Grand, they will do the spa Tower at Bellagio (built in 04') Luxor/Excalibor, and the Hotel at Mandalay Bay.  Expect that rooms will be out of service for a while. 



  • $2.2BN of consolidated net revenue and $444MM adjusted EBITDA
  • Las Vegas Strip resorts saw a 13% RevPAR increase
  • "The overall table games hold percentage in the third quarter of 2011 was near the low end of the Company’s normal range of 19% to 23%. The overall table games hold percentage in the prior year was near the mid-point of the Company’s normal range.  Slots revenue increased 4% compared to the prior year quarter, with an increase of 6% at the Company’s Las Vegas Strip resorts."
  • "In the current quarter, the Company recorded an impairment charge of $80 million (or $0.11 per share, net of tax) related to Circus Circus Reno... related to the carrying value of its long-lived assets"
  • MGM China: Adjusted Property EBITDA $139MM
    • "We are extremely pleased with our Cotai development plans while at the same time have some exciting expansion opportunities within our existing MGM Macau property.”
  • CC Adjusted Property EBITDA: $50MM
    • Net revenue: $255MM
    • Aria Adjusted Property EBITDA: $40MM
      • "Hold percentage was above the high end of its normal range in the current quarter, but lower than the prior year hold percentage by approximately 400 basis points"
      • RevPAR: $173 (ADR: $200/ Occ: 87%)
    • Vdara: $5MM of adjusted property EBITDA
    • Crystals: $6MM of adjusted property EBITDA
  • "In September 2011, the Company borrowed an additional $879 million under its senior credit facility to increase its capacity for issuing additional secured indebtedness; these borrowings were repaid immediately after quarter end. As a result, the Company had a higher than normal cash balance at September 30, 2011 of $1.8 billion, which also included approximately $494 million of cash and cash equivalents related to MGM China."
    • At 9/30: $551MM outstanding on MGM Macau's R/C 

Retail: Q4 Vortex


This morning’s sales reports reinforce our standing view that Q3 is setting up to be the worst in two-years. Following a choppy August BTS season, September sales came in better than expected setting the stage for what turned out to be a very disappointing October to cap off Q3. Perhaps the biggest callout out of October numbers is the swing in top-line trends. This is stating the obvious – we realize; however, recall that sales came in stronger than expected, but weren’t translating to commensurate bottom-line growth last month. Now both top-line AND bottom-line trends are rolling heading into Q4. The result is widespread revisions for both Q3 as well as for the full-year. In addition to continued weakness in low-to-mid tier markets, the spread between high-end outperformance relative to the low-end narrowed in October reflecting incremental weakness at the high-end. Despite the chink in high-end demand, the low-to-mid-tier retailers (e.g. BONT, SSI, JCP, etc.) are slowing at a faster rate. We still firmly think there will be an increased bifurcation between upward and downward revisions in retail over the next quarter and into 2012.


A few additional callouts in October:

  • The High/Low-end performance spread has narrowed. Within department stores,  Neimans +8% and JWN +5.4%continue to post solid results while SKS +1.8% and M +2.2% came in weaker than expected and more in-line with KSS, +3.9%, TJX +3%, and SSI +0.8%. The clear underperformers were JCP -2.6% and BONT -10.2%.
  • Consistent with recent months, Discounters continue to be among the strongest performing segment of retail. This is likely due to greater grocery exposure, which continues to be a key category. Retailers with exposure there (TGT up low-teen and COST up DD) fared better than most with COST betting expectations and TGT coming in light, though still up +3.3%.
  • JCP was again a clear negative callout. While the company didn’t revise its guidance, it should have and we expect it to when they report next week with Q3 comps coming in down -1.6%. The Street’s at $1.19 for Q4, we’re shaking out under a buck. A consistent disappointment of late is the company’s e-commerce, which posted its third straight decline down -4.5% with comps ahead only getting tougher. This continues to defy explanation as e-commerce is one of the few positive channels for any retailer not named JCP.
  • Lastly, we have to callout HBI admitting that it got its forecasting wrong on last night’s call. Compounding the error, they also highlighted that after a tough August, strong sales in September and October should reaccelerate order demand. Perhaps they should have held the call until after retailers reported October sales as that certainly doesn’t appear to be the case. 

The bottom-line is that sales are now getting weaker across the board – including at the high-end. However, the domestic mid-tier market continues to experience a more aggressive roll in both  top and bottom line results setting up for increased volatility heading into year-end. We would still avoid most names that touch the domestic mid-tier market. 


Shorts: JCP, HBI, UA, GIL

Longs: LIZ, WMT, NKE


Retail: Q4 Vortex  - SSS BeatMiss 11 11


Retail: Q4 Vortex  - SSS Mo Seasonality 11 11


Retail: Q4 Vortex  - total SSS 11 3 11


Retail: Q4 Vortex  - SSS one year comps 11 3 11


Retail: Q4 Vortex  - SSS two year comps 11 3 11


Retail: Q4 Vortex  - Equal Weighted SSS 11 3 11


Casey Flavin







Notable macro data points, news items, and price action pertaining to the restaurant space.





Initial jobless claims came in at 397K versus 400k expectations and a revised 406k in the week prior.  The drop below the 400,000 threshold in the latest week was better than expected improvement and puts initial jobless claims at their lowest level since late September; the downtick in claims points to slowly improving economic data. Continuing claims dropped in the prior week.


Bloomberg Consumer Comfort Index fell to -53.2 in the latest week the second-lowest reading in almost 26 years of data.  The index has held below -50 for six of the past seven weeks; a period unmatched even during the 2008-2009 recession.








WEN:  Wendy’s top-line has strengthened thanks to advertising and the new burger.  We now like Wendy’s on the long side from a TRADE (3wks or less) and TAIL (3yrs or less) perspective.  We have no stance on the TREND (3mos or more). 


EAT: We like Brinker on the long side from a TRADE (3 weeks or less) TREND (3 months or more) and TAIL ( 3 years or less).  Today's new from DIN and CHUX suggest that Chili's is gaining share in the Bar & Grill space


THE HBM: WEN (TRADE UPDATE), DIN, CHUX, DRI, CAKE - applebees chilis




STEAK CATEGORY: Outback Steakhouse launched a new holiday promotion Wednesday that includes steak combinations with grilled shrimp, ribs and lobster tail.  Officials with Outback’s Tampa, Florida-based parent OSI Restaurant Partners LLC, said the combination plates start at $11.99 and will be available through January 17. Options include herb-roasted prime rib paired with a lobster tail and served with a side salad; Outback’s signature sirloin paired with a skewer of grilled shrimp; or a six-ounce sirloin served with a half-rack of wood-fired grilled ribs. All are served with a dressed baked potato


DIN:  Dine Equity reported Q3 EPS of $1.04 versus expectations of $0.99.  The company reduced guidance for Applebee’s domestic system-wide same-restaurant sales performance to a range of 1.5% to 2% versus 2% to 4% prior.  Consensus is 1.7%.  Consolidated free cash flow guidance was lowered to between $104 and $114M which reflects a reduction from previous expectations of $112 to $122M.  We believe that Chili’s is part of the problem and continue to like EAT.


CHUX: O’Charley’s reported a loss of -$0.18 versus expectations of -$0.17 for the third quarter.  Comps came in at -0.9% versus consensus of +0.7%.  The overcrowded Bar & Grill category is suffering.  Ninety Nine’s 3Q comps  were +4.1% versus expectations of +1.7% and Stoney River printed a +6.8% versus expectations of +3.8%.


DRI: Darden was downgraded to Neutral by Janney Montgomery on concern that comps are decelerating.  We agree that comps are decelerating but there are better shorts in the group.


CAKE: Cheesecake Factory was downgraded to Neutral by Janney Montgomery.





Howard Penney

Managing Director



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Licking Gravity

This note was originally published at 8am on October 31, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We can lick gravity, but sometimes the paperwork is overwhelming.”

-Werner von Braun


The only problem with last week contributing to the best month for stocks since 1974, is the 1970s. This morning, between German Retail Sales falling to flat year-over-year and Eurozone inflation (CPI) remaining at +3%, European Stagflation remains.


Most of last week’s fanfare can be boiled down to one solid gravitational factor that underpins all of the math behind what we’ve been calling The Correlation Risk – the US Dollar. If you get the US Dollar Index’s direction right, you’ll get most other things right.


The US Dollar Index is up +1.3% so far this morning. That’s a good start to my week because my being long it last week was nasty. Inclusive of a -1.7% week-over-week drawdown, the US Dollar was down for the 3rdconsecutive week, and down -4.6% since the week ended October 7th, 2011.


Since that 1stweek of October (after the Cover of Barron’s said “Watch Out, Mr. Bull” – this weekend it said “Not So Fast, Mr. Bear”?), this is what other major moves in Global Macro have looked like:

  1. Euro/USD = +6.1%
  2. CRB Commodities Index = +6.6%
  3. Oil = +12.5%
  4. Copper = +14.9%
  5. Volatility (VIX) = -32%
  6. 10-yr US Treasury Yield = +12%

So what was this all about – Growth or Gravity?


We’ve had plenty of rallies since the start of 2011 where consensus has been convinced that this has been all about growth. The only problem with that is that there is a big difference between growth and inflation. That’s why the legitimate calculations of GDP growth apply a legitimate “deflator” to the nominal growth estimate. It’s called the purchasing power of money.


Remember in Q1 of 2011 when Sell-Side and Washington “economists” had +3-4% 2011 GDP and 1450 SP500 targets? We do. We also remember that the price of oil was tracking upwards of $110/barrel – and that had a big impact on global economic growth slowing.


After it was revised -81% to the downside versus the “preliminary US government estimate”, US GDP growth in 1Q11 was only 0.36%. That was using a “deflator” that we’d consider accommodative to the Big Government Interventionist camp that it’s not Policy, Stupid.


That was then – this is now. What does this economy need from here?


A)     More US Dollar Debauchery

B)      Higher Oil prices

C)      Stock market cheerleading based on A) and B)


Alex, I’ll take a restroom break and the other side of Jon Corzine’s long/short book for $1,000.


Obviously most people whose compensation isn’t solely tied to stock market inflations are allowed to get the point here. Not surprisingly, amidst last week’s generational squeeze, a few not so funny things happened on the way to the Europig Forum:

  1. European PIIG Bond Yields (Italy most specifically) hit new 3-year highs
  2. TED Spread (measures global banking counterparty risk) hit a new 2011 YTD high
  3. US Financials (XLF), The Russell 2000 (IWM), and the price of Copper (JJC) all failed at their long-term TAIL lines of resistance

Now that last point is probably the most interesting – because, essentially, it ties back to the aforementioned point about growth. It’s a question really. The Question this morning (as in what you do with your money right here and now): is Global Growth “back” OR was that just another Dollar Down reflation of asset prices?


Longer-term, I think the only way to recover real US economic growth (adjusting for inflation) is to:


1.       Strengthen the US Dollar

2.       Deflate The Inflation

3.       Strengthen Employment


In the Chart of the Day, you’ll see this quite clearly across US Presidential terms. Someone running for President in 2012 really needs to use this picture. Going all the way back to when Richard Nixon abandoned the Gold Standard (1971) and embarked on today’s Euro-style debt monetization scheme, a Strong US Dollar = Strong America.


To be sure, looking back at the last 18 days of the biggest move ever in stock prices (ever is a long time), Licking Gravity’s  short-term political resolve has its Month-End Markup perks, for some of us…


But, for most of us, the long-term TAILs of Global Growth are still broken.


My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND), Oil (bullish TRADE; bearish TAIL), German DAX (bullish TRADE; bearish TAIL), and the SP500 (bullish TRADE and TREND) are now $1706-1774, $90.19-93.86, 6098-6455, and 1267-1294, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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“A plague o’ both your houses!”

-Mercutio, Romeo and Juliet


Mercutio’s immortal phrase was aimed at the houses of Montague and Capulet whose feuding led to the tragic sequence of events that make up one of Shakespeare’s most famous and timeless pieces.  The phrase has been resurrected ever since to express frustration, typically with two opposing sides of an argument. 


Franklin Delano Roosevelt, following a bloody clash between striking steel workers and the Chicago Police Department that came to be known as the Memorial Day Massacre of 1937, said that “The majority of people are saying just one thing, ‘A plague on both your houses’”.   Today, among the dearth of political leadership in Washington at such a time of crisis, many in the country are saying the same to the respective political parties.


Frustration is usually a transient feeling, sooner or later dissipated by resolution, compromise, apathy, or distraction.  As being poor became a way of life for many during the Great Depression, it seems frustration is now becoming a core component for not only the American existence, but for many people around the world. 


Conspiracy theories abound regarding the Federal Reserve and the degree of corruption that exists in America’s economic and political institutions but, Ben Bernanke’s assertion that the slow pace of economic growth is “frustrating” seems genuine to me.  I think frustration is something the country can relate to.  However, it was nearly unconscionable to me that he would used the phrase of a “bit of bad luck” when referring to the spike in oil prices and the dampening effect it had on economic growth this past year.  It was clear to us at Hedgeye that the Federal Reserve’s own policies were significant drivers of higher oil prices.       


Another political plague exists today in Europe as the never-ending saga of the sovereign debt crisis rambles on.  It has long been said by European officials that the union must be preserved and that the respective futures of the member states are inextricably linked, by both circumstance and by law.  I would view the former as being somewhat subjective and the latter as being, as was shown when Brussels consented to bailouts that may or may not be forbidden by the Maastricht Treaty, completely open to interpretation if the situation demands it.  A dramatic series of events is needed and the one certainty is that there will be pain.  Listening to politicians bending logic and essentially wasting further time with tired old solutions is becoming frustrating for Europe’s people.     


When President Obama was elected in 2008, he had successfully campaigned on a message of change.  I, like many other Americans, was taken by the message and the delivery, but it’s not possible for one person to change a compromised political system and this country is realizing now that there will be no quick fix.


This realization is all the more daunting when one considers that many of the same actors are in the same roles that they’ve been in for years.  Geithner and Bernanke are some of the most obvious examples but recent news of John Corzine possibly being culpable in the collapse of MF Global following his claim that thirteen years ago he “understood the flaws” at Long Term Capital Management better than anyone is equally disheartening.   


If repeating the same action again and again and expecting a different result is the definition of insanity, to use Einstein’s quote, then surely entrusting the same players with the same or similar responsibilities and expecting different results is also a folly.   In this respect, Wall Street and Washington D.C., are frustrating their shareholders and voters to no end.


The cast iron dogmas of the sphere of investing, as those of the policy world, are being exposed as useless.  We believe that a flexible, nimble, and data-driven investment process is essential to surviving the turbulence that is visiting the financial markets with greater and greater frequency as the unpredictable actions of governments continue to cause uncertainty.  Clearly some of the old guard in Wall Street, and Mr. Corzine is one example, have not learned to invest prudently. 


Over recent weeks, predicting whether macro factors or earnings were to be the driving force behind stock performance on any given day has been a fool’s errand.  With the wisdom of hindsight, however, I can say that macro factors have been more of a focus than earnings over the past month.  The “Greece Doesn’t Matter” television pundits have been quiet of late.  Soon the earnings season will be over and a new macro season starts.  Our “King Dollar” thesis is going to be one that we monitor closely with a minefield of catalysts heading into the holiday season.  Hedgeye has been highly accurate in calling the US Dollar over the last three years and, as Keith likes to say, “if you get the dollar right you get a lot of other things right.” 


Just as Wall Street needs a change in leadership, our policy makers need to step aside and allow new leaders to win back the confidence of the country.  The Federal Reserve’s forecast for GDP growth in 2011 is now 1.6%-1.7% versus 2.7%-2.9% prior and 2.5%-2.9% versus 3.3%-3.7% prior for 2012.  In a year, according to the Federal Reserve’s updated economic projections, the unemployment rate is scheduled to be 8.6%.  The Federal Reserve’s track record is less-than-satisfactory, so those projections certainly should not be relied upon and are likely overly-optimistic.  A mere 40 basis points of improvement in the unemployment rate is certainly frustrating.   40 basis points is of little use to the 46 million Americans now depending on food stamps for sustenance.


I can respect the experience that many of the policy makers in Washington possess and would love to someday hear or read any of their perspectives on what went wrong in the last few years.  However, given that this country is currently embroiled in a sort of economic Vietnam, I believe that the coach – President Obama – will ultimately be judged harshly for not having brought in new players in key economic policy roles.  Experience can be good but it isn’t necessarily always helpful.  As Robert Benchley said, “A boy can learn a lot from a dog: obedience, loyalty, and the importance of turning around three times before lying down”. 


Function in disaster; finish in style,


Howard Penney


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