- Specifically, of the food consumed away from home, about 40% is consumed in cafeterias, 20% in restaurants, 10% in fast food venues and another 10% at small food stands. Meat is the leading food category that is consumed outside of the home with over 50% of household meat consumption occurring away from the home. Seafood is number two with over 30% of household consumption outside of the home and about 30% of drink purchases are for away from home consumption. The report goes on to show that these away from home consumption levels rise with increased income.
- The obvious beneficiary of this shift toward more away from home consumption in China is YUM. China currently accounts for nearly 30% of YUM’s segment operating profit and the company expects this profit contribution to grow to 40% by 2017. A cultural preference for dining out will make it easier for YUM to achieve this goal. YUM’s China same-store sales slowed somewhat in 3Q08 on a sequential basis to 18% (from nearly 30% in both 1Q and 2Q), and the company is lapping a difficult 30% comparison in 4Q08. That being, said the company is well positioned to capitalize on China’s growing economy over time. As incomes rise, YUM will benefit as more people choose to dine out.
- Starbucks is another company that is betting on China. SBUX expects that China will become its largest market outside of the U.S. and is, therefore, increasing its investments in its China operations. At the end of fiscal 2007, SBUX’s stores in China accounted for 8% of its International store base, and the company more than doubled its FY07 company-operated unit openings in China from the year prior. SBUX’s China business will be helped if the percent of drinks consumed outside of the home continues to grow beyond the 30% level.
Week Ended 11/14/08:
DJ (5.0%), SP500 (6.2%), Nasdaq (7.9%), Russell2000 (9.7%)
November 08 To Date:
DJ (8.9%), SP500 (9.9%), Nasdaq (11.9%), Russell2000 (15.1%)
Q408 To Date:
DJ (21.7%), SP500 (25.1%), Nasdaq (27.5%), Russell2000 (32.8%)
2008 Year To Date:
DJ (35.9%), SP500 (40.5%), Nasdaq (42.8%), Russell2000 (40.4%)
Slot functionality exceeds the actual average life cycle of 5-6 years by at least 5 years. Slots don’t breakdown. If an operator needs liquidity, they will cut slot Capex. Delaying Capex is the number one consideration for CFOs as they prepare their 2009 budgets. As soon as their budgets are communicated to the slot companies, 2009 guidance should come down. Analysts haven’t yet embraced this reality. As we discussed in our 11/2 post, “CAPEX, COVENANTS, AND CORPORATE CONTROL”, they continue to project roughly 10% revenue growth for WMS and BYI and still positive revenue growth for the slot industry in 1H 2009.
If you don’t believe me, check out the following management YOUTUBE from the Q3 conference calls. Remember, slots comprise the largest portion of maintenance Capex.
BYD Q3 2008
Question: “Do you think you maintenance is sub $100 million right now or can you get away with spending $80 million a year in maintenance?”
Answer: “We can probably at this point run the business sub $100 albeit some of the things that we opportunistically put off we will deal with in future quarters or in the following year.”
LVS Q3 2008
My guess is that LVS may not buy a single replacement slot machine next year given its financial situation.
ISLE FQ1 2008
Guiding $40 million in Capex for this fiscal year, which is about 30% below normal just for maintenance Capex. Next fiscal year will likely be even lower.
ASCA 3Q 2008
“So I guess at this point in time, in that $40 to $50 million range of maintenance CapEx again for next year, obviously subject to change based on the economy.”
The midpoint of the range is 30% below normal levels even before the “based on economy” adjustment.
PENN 3Q 2008
“Well I think maintenance CapEx next year should be between $75 and $80.”
The midpoint of the range is 36% below normal levels, and these guys have liquidity and are underleveraged!
PNK 3Q 2008
Question: Is the $9 million in the quarter sustainable or will that go back up?
Answer: Between 9 and 10, but it was running as high as 11 for a while there. Look, we'd like to get it as low as we can but we're not going to do miracles here. In fact, let me step back. It's an interesting environment we're in, in a lot of ways, especially in the casino business. “A lot of our competitors are in pretty rough shape and we hear the same stories you have that their not buying a single slot machine this year, or their cutting their maintenance CapEx to the bone.”
Harrah’s 3Q 2008
“Maintenance capital expenditure usually runs 4-5 percent of net revenue. That is being reduced to half of the normal amount or less.”
TRMP Q3 2008
Question: I wonder if you can give us a little more clarity as to what minimum maintenance CapEx might be and a sense for what your minimum cage cash could be next year.
Answer: “The CapEx we're going to limit to only essential compliant or life safety issues. We're not anticipating any more than $10 million between the three properties next year for maintenance capital.”
This bankruptcy candidate may not buy any replacement slots next year.
Magazine covers are intended to sell magazines. The related cover story is typically written because that featured topic is resonating with the public at that moment. When a magazine decides something is worthy of its publication’s highest profile, it usually means that trend is reaching a climax.
Why does this work as a contrary indicator? MCD is a classic example. We have included three pictures of magazine covers in this post: two feature MCD and one focuses on SBUX. The two MCD cover stories pictured were published in 1998 and 2007, respectively. Then look at the cartoon from the Seattle post last week.
Just building a mosaic!
I had just gotten back from a family vacation in London where I noticed many hotels offering a free room night with every two paid nights. Here, the hotels are incorporating the power of 3 into their marketing pitch. The marketing executives may be pursuing the right mathematical process but a 50% giveaway is a bad signal for the industry. Demand is falling off a cliff, particularly in the gateway cities.
Here is a sampling of hotel promotions:
• Intercontinental Hotel Group - Holiday Inn two-nights-for-one
• Starwood: offering a “pay your birth year” promotion for the second and third nights of a 3 night stay
• Four Seasons: a number of Four Seasons hotels offering a 3rd night free
• Baltimore: City-wide promotion, 3rd night free
• Luxor Las Vegas: Stay 2 nights and get the 3rd night free
• Marriott: 2 nights, third night free at Rive Gauche in Paris
Margins are looking scary. It might be time to call for another 25% reduction in EPS estimates for the hotel owners.
And yes, we are selling into it... that's what winners do. We aren't going to get piggy here. This isn’t a Depression, but it is a recession, after all... we need to ration points when we are awarded them. Keep a "Trade" a trade.
See levels below: SP500 resistance lines are material up at 920 and 920. Sharks can jump and bite bulls too, don't forget.
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