The Macau Metro Monitor, January 27, 2012




The number of junket operators reached an all-time high of 219 in 2011, up 13% YoY.  The last peak in junket operators was in 2007, when there were 186 registered junkets.  With 34 casinos in the SAR, there is an average of six licensed junkets for every casino. 


By contrast, industry estimates of the number of unlicensed junkets working in Macau under the umbrella of those who are officially registered range widely, from several thousand to more than 10,000.


Bad CYQ4 for any other company, but not that bad for WMS.



“Reflecting the quarterly sequential improvements in unit shipments, revenues, diluted EPS and cash flow from operations, and the ongoing improvements in the pace of jurisdictional approvals for our newest products, we believe the inflection point in our operating and financial performance is now behind us”


- Brian R. Gamache, WMS Chairman and Chief Executive Officer




  • Believe that their quarterly ship share increased sequentially and expect to realize continued ship share gains 
    • We agree but then again they always experience a sequential share increase from the September to December quarter
  • Think that they can get to previous ship share levels
    • We disagree - it's not going to happen for many reasons
      • Better competition
      • They were very under-represented on older floors and therefore got an outsized portion of the replacements - now that their floor share has normalized, their replacement share should be closer to their new share.
  • Think that they will get high teens ship share in new openings
  • Alberta: WMS selected to replace 25% of VLTs - shipping in 1H13'
  • Manitoba and Saskatchewan are also expected to announce RFP results over the next few months
  • 1,500 unit deal they got with a large casino operator will be shipping end of FY12
  • New participation products introduced in 2H12 will feature new 'hooks' and player life features
  • Networked gaming: continue to grow their global presence - WAGE-NET connects 900 games worldwide.  Goal is to be installed in 100 locations worldwide by their fiscal year-end.
  • Their online strategy is to move to B2B once they demonstrated their success on their own site
  • $16MM of savings achieved in SG&A in the last 6 months 



  • They aren't selling their participation games.  Typically, for every two games they install, one comes out, but this time they only got 1 for 1.  They have a 1,900 unit backlog now and are hoping that 50% of those are incremental. 
  • 15% of their product mix was premium vs. 25% a year ago and that coupled with competitive pressures, resulted in a small YoY decrease in pricing. They don't think that prices are going to be declining for the longer term.
  • Their 1,500 unit placement wasn't that unusual in terms of what they normally get
  • Average revenue per day is a combination of the economy and better competitive content.  A little softer than they thought but hope for an uptick in 2H12.
  • Hope to be flat YoY in their install base
  • Participation backlog is 70% new themes and 30% refreshes
  • Expect sequential margin improvement in product sales - not YoY
  • When will the shipped but not recognized units be recognized? 
    • 2H12 - unclear if it will all be next quarter
  • Their litigation settlement benefit was in interest and other income
  • Their online strategy has always been to move from B2C to B2B
  • Will be spending roughly the same on the participation swap out as last year- $65-70MM but that number will decline in FY13
  • The benefit from cost reductions will be less in the back half since costs cuts are going to start lapping
  • 55 new games approved in F1H'12
  • One aspect of the revenue recognition policy wasn't met; hence, the deferral
  • CPU Next-3 is launching on Aladdin first in Q4 and then a whole bunch of games in F13'.  When they released CPU Next 2 that was a catalyst for them to gain a lot of share. 
  • Legislator in Australia has proposed nationalizing gaming.  Therefore, operators have to cut back a bit on purchasing as they wait to see if there are going to be nationalized rules implemented.
  • 1,500 unit deal - recognized in the quarter that they ship as game sales
  • Where did the international sequential unit growth come from?
    • Macau: Sands Cotai Central opening
    • Argentina and Latin Am has been particularly active
    • Europe remains slow but ICE show was promising
  • They sell their international units in USD so there is no FX benefit
  • This past quarter they bought back stock with cash - the draw on their line was from last quarter
  • They see growth in the online space
  • The refreshed gaming operations products are all outperforming the games that they are replacing
  • When they had 30% ship share, they got too aggressive on their product development schedule; so basically started developing product that was "too forward looking" which made the products difficult to approve and digest by their clients. 



  • WMS reports $0.27, missing consensus by 3 cents when you exclude the litigation settlement benefit. 
  • Reached agreement with a major multi-site casino operator to replace 1,500 Bluebird gaming machines with Bluebird2 and xD units
  • "Surpassed 800,000 unique log-in users for Player’s Life Web Services in January 2012"
  • “We expect quarterly sequential improvements in revenues and operating margin to accelerate in the second half of fiscal 2012, as the return to a more ratable schedule for the development and ongoing commercialization of innovative new products continues, as we realize the benefit of increased demand from new casino openings, and as we maintain our disciplined focus on improving operational execution and cost containment. These improvements are expected to drive year-over-year growth in both total revenue and operating margin in the second half of fiscal 2012. We believe the continued improvements and operational progress will lead to an even stronger year in fiscal 2013 for WMS.” 
  • "Momentum for the commercialization of our forward-thinking network gaming system continues to gain traction with more than 50 casinos around the world now running our networked gaming solutions on their slot floors"
  • Product sales:
    • 4,846 units recognized and 5,803 shipped
      • NA: 2,759; with 2,200 replacement units
        • There were "957 additional new units for new casino openings and expansions that were shipped at the customers’ request, but not recognized as revenue in the December 2011 quarter"
      • International units: 2,087
        • YoY decline primarily attributed to Mexico and Australia
    • ASP: $16,325
      • YoY price decline "reflecting the competitive marketplace and a lower mix of premium games"
    • Bluebird xD units: 34% and mechanical reel products: 13%
    • Used games: 1,600
    • Conversion kits: 5,000
  • Gaming operations: EOP install base of 9,282 at an average revenue per day of $67.62
    • So much for stabilization in game operations - this quarter saw another sequential decline of over 300 units and YoY yields fell by 9%. The company claims that these are normal seasonal declines and that the unit drop is attributable to the already disclosed product delays.
    • Lower YoY gross margins "reflecting unfavorable jackpot expense experience and increased costs from the networked gaming and online gaming businesses that were launched within the last twelve months"
  • "WMS expects to achieve sequential growth in its installed participation base and average revenue per day in both the March and June 2012 quarters." 
  • "Company expects its effective tax rate in the second half of fiscal 2012 to be 36%-to-37%."
  • "During the three months ended December 31, 2011, the Company purchased $9.6 million of its common stock, or 500,449 shares, under its share repurchase authorization"
  • Outlook:
    • "WMS expects to achieve further quarterly sequential growth in revenue and operating margin in both the March and June 2012 quarters, leading to year-over-year growth in the second half of fiscal 2012"
    • "WMS continues to believe fiscal 2012 annual revenue will be below fiscal 2011 revenue" 
    • "Annual operating margin is expected to improve year over year due to the Company’s cost containment and restructuring initiatives."
    • "Expect that sequential growth in the second-half of the fiscal year will be driven by improvements in the flow of approvals for new products, modest growth in the gaming operations business and an improvement in new unit demand from new casino openings. The Company does not expect revenue in fiscal 2012 from the opening of the Illinois VLT market or from the VLT market in Italy." 
    • "Only limited improvement in the industry replacement cycle in calendar 2012." 
    • "R&D spending in fiscal 2012 is targeted to approximate 13-to-14% of total annual revenues." 


When a private company starts issuing press releases like a public company, it probably wants to be a public company.  We smell IPO.



In another sign of the bullish times, Blackstone may be sniffing to make a public exit of its investment though an IPO later this year.  Why else would they be publishing press releases that highlight how they are the fastest growing major lodging company?


On January 24th, Hilton Worldwide put out a press release ahead of the ALIS conference highlighting that it “has become the fastest growing major hotel company, expanding its portfolio by 29 percent since June 2007 and surpassing its competitors in total rate of room growth…Our momentum will continue with one of the largest pipelines in our history and in the industry."  There were rumors last March that Blackstone was testing the waters for an IPO last year but perhaps the second time will be a charm.  Hilton CEO Chris Nassetta commented last week that the company is thinking about an IPO but is in “no rush to go public."  If these RevPAR trends continue, they may not be so patient.


As a reminder, Blackstone purchased Hilton for $26BN in July 2007 and saddled the company with $21BN of debt.  In February 2010, Blackstone restructuring and reduced Hilton’s debt load to $16BN.  In 2006, HLT’s Adjusted EBITDA was $1.75BN.  We think $1.8BN in 2012 EBITDA isn't far-fetched.  If they can get a reasonable 12x forward multiple, then Blackstone would be close to par on their $22BN investment ($26BN- $4BN in debt reduction).  Currently, Hilton has 633k hotel and timeshare rooms compared to 500k in 1Q07.

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JCP: Competitive

Did we change our view on JCP in the wake of the meeting? No. We wouldn't buy the stock today. But our thoughts definitely evolved.


The three biggest items are what we'll call 'Competitive' -- Bid, Landscape, and Pressure. The first one is good, the second...not so much, the third is a big tail risk.


Bid: one of the things we like best about where JCP is headed is that it is cutting its floor from 400+ brands down to 100 shop in shops. That number is fixed, and the number allocated to each consumer type men, women, kids, home, etc...) is even more limited. In effect, this will definitely get a better portfolio of product as brands compete for that space, not unlike how they do at Wal-Mart. This is the best equivalent of 'pricing power' that a retailer could have, and is the smartest thing that Johnson is bringing to the table. Keep in mind, however, that JCP will have construction crews in it's stores for the better part of five years (they say 3, I say 5 -- either way it's a long time).


Landscape: let's do some simple math here. JCP accounts for about 7% of the industry. Add on...

A. Tar-gey, who just sent a letter to vendors requiring exclusive product so they're not a showroom for AMZN.

B. SHLD who was temporarily shut off from vendor financing by CIT last week.

C. GPS who lost its head of Old Navy last week.

D. KSS, which is another 8%, certainly won't take any of this lying down.

Add 'em all up and we're looking at over half of the US apparel industry that is putting on their battle gear. Mark my words, my friends, this will not be fun for anyone.


BY FAR THE BIGGEST NEGATIVE is something that no one is focused on, and that is whether Johnson succeeds or fails, he's going to have a lot of something he's never had before...competition.



A final point on guidance...hats off to them for abandoning monthly comps and quarterly EPS guidance. But to then turn around and say [we will never miss our targets -- even if different that yours] is perhaps not the best way to kick things off.  Also, they did not announce any special charge, which I very much thought they'd do. That would give them a cookie jar to get the job done that the Street would 'look through.'


Instead JCP took the high road and plans to transform the company via internally generated cash flow. Impressive move. But one of the risks to a short position from our perspective was having a pot of gold that they can dip into each quarter to pay for change. That's no longer, and it's not bullish.


Here are some of our stream of consciousness comments (@HedgeyeRetail) over the course of the 2-day event.




The $JCP meeting is the biggest thing since that cold Nov day in 2004 when Lampert merged #SHLD and #KMart. See how that turned out?


If $FINL wins $PSS, it would be transformational. But would shock us based on what we know about FINL mgmt.


Am I imagining things, or did #Ackman just grunt at me? $JCP


The announcer just said "our show will begin in 5 min". This is the first analyst 'show' I've been to... $JCP


$JCP Johnson looks comfortable.


$JCP he's talking about how JCP today felt like $AAPL 10-yrs ago. That's what he told Steve in Jobs' living room.


He comparing Apple's growth to the opportunity at $JCP. WON'T WORK...


Thinks that the department store is the #1 oppty in retail. $JCP


Knows his numbers. An $AAPL store does $50mm. Thats in line w a $M Macy's. $JCP


Item that cost $10 in 2002 and $2011, was marked from $28 up to $48. But realized price is flattish. $JCP


72% of rev at 50% off at more. $JCP 75% of time within a 25% price band.


Discounts used to be 38%, now it's 60%. $JCP #price integrity


590 unique visits. And customer ignored them 99% of the time. $JCP 


Next week we change our price, promotion, and personality. $JCP 


Price: only 3 prices. 1 price change per month. Eliminating clearance from JCP. DISCOUNTS ON 1st and 3rd Friday of every month. $JCP 


Avg price to a consumer is $10. But by the time it. Sells it is $2 out the door. $JCP 


Ly shoe was 40 this year 32. Ultimately out the door at 15. $JCP 


Only 12 promotions per year. 12. 1 per month. $JCP 


Johnson's Word score. #Apple = 15. #Steve = 4. JC Penney = 5. $JCP 


$JCP smart move w Ellen partnership. She has great mass appeal -- especial w Oprah out of daytime limelight.


But remember $GPS deal w Madonna, etc... These don't come cheap.


These $JCP adds are vy cool. But keep in mind that JCP has ALWAYS had great advertising.


Great product sells itself (RL, LULU, NKE). Same for great distribution ($AMZN $JWN). But sub average product ($JCP) needs great mktg.$$$


There's no way in my right mind that I can argue that $JCP is not exciting. BUT I want to know how much all these initiatives cost!


I can double the size and value of my house, but I have to spend the capital to make it happen. Capital comes first, which hits the P&L.


Revenue comes later -- if capital deployment is successful. That's awesome, and will turn $JCP into a big big idea. But not for 2-3 yrs out.


Remember, Ron gets paid POST 2016. He purposely missed targets in early days of Apple for the benefit of LT profitability. $JCP.


He'll do the same thing at $JCP. But there will be a lot of reinvestment along the way -- and all of it front-loaded. It's not in numbers.


Last yr 590 promos Spent 2mm /promo = $1.18Bn/yr Will spend $80mm/mo in 2012 = $960mm =$220mm in savings


Will transfer 2/3 shops by month over 2-3 years. Done in 2015. These will be smaller shops within shops. $JCP.


In Feb, eliminating non-performing brands. Boosting private brands. And reinvesting heavily in content. WORTHINGTON, ST JOHN'S BAY. $JCP


$JCP Stafford will be a focus. JFK Collection. Will be repositioned.


Sounds like $JCP is definitely making a focus on upper end.


$Very positive on $LIZ. 600 stores in Aug 2012.


#L'amour Nanette lepore will be new to $JCP.


#Arizona Jeans also will be repositioned.


#Izod big focus. Admits it is broadly distributed, but should be a focus. Likes working w $PVH.


Hyping up $MSO Martha Stewart living.


$JCP Martha just took the stage in her black leather pants and white cashmere sweater. Presents well tho better if she ditched index cards.


With the #Martha and #Ellen they're clearly targeting the female consumer -- and the two audiences are not identical.


Everyone can be all hyped up on this story for 22 hrs. There will be a press release tomorrow am outlining the cost. $JCP


Bumped into #Cindy Crawford at $JCP. She's so marketable. Olsen twins too. But not quite in the same ballpark.


$JCP #EDLP I guess that Every Day Low Price now means Every Day Low Pay


Day 2 of $JCP starting. Yesterday -- the dream. Today -- financial reality. No Martha, Cindy Crawford and Olsens today. Just accountants.


$JCP I know they said this yesterday, but the impact of going from 400 brands to 100 shops in a HUGE impact to the competitive landscape.


$JCP wants the simplification to lead to lower costs and no more 'false precision'


$CFO SG&A spread w $KSS is $1.5bn on an apples to apples basis.


By 2013, SGA down to 30% by 2013, and 27% by 2015. $JCP


$JCP 900mm in cost cuts at stores and corporate.


Going from 2 promo packets per week to 1 per month. That means fewer people to re-sticker product. Saves $50mm. $JCP.


$JCP has 9 cash registers that are in stores, but not used. They're out...more selling space is in. This labor saves $100mm.


Is it me, or are $JCP employees scared out of their wits watching this?


$JCP flat org...not fat. Other retailers have avg span of control is 8 direct reports. $JCP has 4.


If $JCP succeeds, it will be scary for the industry.


How does $JCP account for the fact there will be construction crews in its stores pretty much forever.


Costs are $800mm in 2012. $JCP


I like the fact that they're actually acknowledging that bringing in revs are part of the SGA ratio. $JCP


I'm tired of hearing about Sephora. I love the place, but, $M, the new specialty shop in local outlet mall. Real estate matters.


$KSS is watching this now. And I'm SURE they're thinking 'Cool, let's roll over and let a company with bad real estate get more competitive'


No more quarterly guidance. $JCP


No more monthly sales on NRF day. $JCP


"In 2012 will have EPS of better than 2010." Go get 'em! $JCP


Ron just tripped up the stairs. $JCP


Bill Perez fell into the fountain on his first day as $NKE Nike's CEO. He was gone a year later. $JCP


No that's no cheap shot. It's simply stating a fact. I think RJ is in this for the long haul. At $JCP he's not afraid to trip. That's good.


Most of merchandise has been at new pricing strategy for 4 weeks. They'll know initial results on Feb 1.


@herbgreenberg plus a -15pt spread between sales/inv gr. That's about in line w 2q. But margins turned positive. +mgns and -inv is bearish


"Capital support from vendors to help with transformation. The vendors are excited to be a part of this." $JCP


That's because they vendors better be excited, or they get booted. $JCP


Only 100 shops, so will have each of them be on a competitive bid trading quality vs price -- both in favor of $JCP. Makes sense to me.

As you hear this management team, recall they they account for about 7-8% of industry. $KSS is another 8%. Competition heating up boys!


"Absolutely no way we will ever give guidance and miss it." RJ


[If ratings agencies want better balance sheet, then will need to consider that as it relates to self-funding plan.]


Q: who is current customer. A: {circular dance around not answering the question} $JCP


RJ gives sensible answer... The customer matches up the merchandise. But then adds a confusing one 'we can be a store for everybody'


It's impossible to be a store for 'everybody' unless you sell non-discretionary items.


Does not want to have to ask vendor for markdowns. RJ thinks current relationship w vendors/dept stores is dysfunctional. $JCP


$JCP analyst just tried to trip up RJ on questions about markdowns. He handled it like a pro -- unlike a typical retail CEO.


Hired Kristin Bloom, who they they honk is smartest in the world at retail technology. $JCP


Eliminating 'task work' employees. Hiring 'service work' employees. Smart, but expensive. $JCP


New categories are possible if not probable. Electronics, appliances, whatever. Not sure how I feel about that. $JCP


Q: Would consider allowing brands to rent space, own inventory, and own service EEs? A: [Prob not] $JCP


@herbgreenberg agreed that guidance is downright unhealthy. saying 'we'll never miss OUR targets even if different from yours' is dangerous!


$JCP Great job Ron. But prob should not have ended with 'cross your fingers, we'll see you in 3 months.' Crossing fingers is not a process.


Our Sentiment Scorecard, below, incorporates both sell-side and buy-side sentiment.  Below are some of our thoughts.


As the table, below, indicates MCD and YUM as still loved by the investment community.  It will be interesting to see if there is any change in MCD’s score as the short interest post earnings is factored in.  We expect MCD to continue to perform well from a fundamental perspective at least through 1Q12.


EAT remains hated by the investment community but we would highlight that, even after the top-line miss that spurred a sell-off in the stock on Tuesday, analysts raised their FY12 estimates.  The stock gained too much too fast but the fundamental turnaround of the Chili’s concept is far from over.




BWLD remains our favorite stock on the short side.  Short interest is not low but there are others with significantly higher levels of short interest in the casual dining space.  What we believe will change more meaningfully for BWLD, however, as our thesis plays out, is sell-side sentiment.  The analyst community has zero sell ratings on the stock.  We expect that to be revised in the next few weeks.




SBUX reports today and remains very well-liked by the investment community.  The pressure is on for the company to perform at a very high level and there is plenty of room for sentiment to turn.  We will be watching the top line and CPG margins particularly closely.





EAT, MCD, YUM, BWLD, SBUX: SENTIMENT TAKEAWAYS - short interest historical



Howard Penney

Managing Director


Rory Green



Early Look

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