Nike: For Beyond LinSanity

If you’ve heard that Nike is hosting an Analyst Meeting next week, that’s not entirely correct. The company is hosting a 2-day all-out media event in New York. If you have not been following Nike for a while, you should know that when Nike does a ‘media event’ it rivals the red carpet on Oscar night. No joke. The company invited the sell side to ‘participate’ (ie observe) Nike in its native habitat.


Make no mistake – people will be star-struck. This event is just days before the NBA all star game, and will likely feature athletes – and their respective products -- that will get people jacked up, to say the least.


While I can’t promise anything, in looking through NBA schedules, the Knicks will be local on the 21stad 22nd. LinSanity, anyone? Don’t forget Stoudamire either. The Nets will also be at Home, which gives us Carmello Anthony. The Heat has a bye on the 22nd, and why not have LeBron, Wade, and Bosch make a detour in NYC after they play Sacramento on the 21st? If you don't think that Nike had these schedules in mind when planning the event, then think again!


This won’t be all about basketball. Translation: I wouldn’t be surprised for people to be Tebow’d.


No, I don’t have any inside scoop as to who will be there. But this IS how the company thinks and operates. A product blitz with all the media and celebrity hype to support it. First class all the way. The average analyst out there (who will also have breakfast with CFO Don Blair) will be impressed.


NKE is still one of our top three long ideas.


In January, Y/Y CPI growth for Food at Home decreased by 70 basis points to 5.3% from 6.0% in December.  CPI for Food Away from Home gained 20 basis points to 3.1% from 2.9% in December. 


This is a trend that we are continuing to monitor closely.  2011 was a year where restaurant margins were impacted by inflation but, due to strong top line trends, rising food costs did not have as severe an impact on earnings as some were anticipating.  Management teams in the grocery space took significant levels of pricing during 2011 and we believe that this was a factor in helping restaurants attract customers.  Food Away from Home CPI was far more benign as restaurant companies prioritized traffic over margin.   Our view in 2012 is that, if the spread between these two CPI data points continues to narrow, the competitive benefit that the restaurant companies enjoyed in 2011 will shrink and any exposure to inflation will be felt more acutely on the bottom line. 


As JACK CFO Jerry Rebel said on a recent earnings call, management teams pay close attention to this data when thinking about pricing so we will continue to monitor these trends closely.


CPI – JAN FOOD AT HOME SLOWS AS AWAY FROM HOME PICKS UP - food at home vs food away from home cpi white



Howard Penney

Managing Director


Rory Green




Big beat probably in the stock



Galaxy should again exceed Street numbers for Q4.  However, given the big run in the stock recently, it probably won’t be much of a surprise.  Our Q4 estimate of HK$14.2BN in revenue and $2.2BN of Adjusted EBITDA is 4% and 21% higher than consensus, respectively. 


Galaxy is up 36% YTD so expectations have risen.  That combined with worries about slowing growth in Macau, share losses in February, and the opening of Sands Cotai Central, we wouldn’t necessarily be running out to buy the stock at current levels.





Like last quarter, Galaxy’s casino operations should benefit from high hold.  Using theoretical hold of 2.85%, we estimate that luck benefited gross revenue by HK$1.3BN and EBITDA by HK$392MM.


Galaxy Macau


We are estimating Q4 revenue of HK$7.6BN and Adjusted EBITDA of HK$1,330MM.  Our revenue and EBITDA estimate are 30% and 39% ahead of consensus, respectively. 

  • Gross gaming revenue of $7.4BN
    • HK$5.7BN of gross VIP win
      • RC Volume of HK$168.3BN
      • Hold: 3.4%
      • Assuming theoretical hold of 2.85%, gross VIP win would be HK$925MM lower and EBITDA would be HK$330MM lower or HK$1BN – still 4.5% above consensus
    • Mass win of HK$1,375MM
    • Slot win of HK$275MM
  • Net non-gaming revenue of $246MM
  • Rebate & commission rate of 1.35% of turnover or 39.7% of win or HK$2.27BN
    • We assume 60% of the VIP business is revenue share based and 40% is RC based
  • Gaming premium of HK$32MM
  • HK$111MM of non-gaming related direct expenses
  • Fixed costs of HK$1BN


We estimate that Starworld will report revenue of HK$6,050MM and Adjusted EBITDA of HK$796MM, 4% and 15% ahead of the Street, respectively. 

  • Gross gaming revenue of $5.9BN
    • HK$5.4BN of gross VIP win
      • RC Volume of HK$174.5BN
      • Hold: 3.1% compared to a hold of 2.9% (excluding this last quarter) since opening
      • Assuming theoretical hold of 2.85%, gross VIP win would be HK$400MM lower and EBITDA would be HK$62MM lower or HK$734MM – still 6.5% above consensus
    • Mass win of HK$499MM
    • Slot win of HK$60MM
  • Net non-gaming revenue of $117MM
  • Rebate & commission rate of 1.4% of turnover or 45.5% of win or HK$2.45BN
  • Gaming premium of HK$16MM
  • HK$29MM of non-gaming related direct expenses
  • Fixed costs of HK$450MM

Other stuff

  • City Club contribution of HK$68MM
  • Construction materials revenue of HK$473MM and EBITDA of HK$128MM
  • Net corporate costs of HK$132MM
  • D&A: HK$275MM

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Comments from CEO Keith McCullough


Two of the Top 3 Most Read (Bloomberg consensus) still staring at the tree (Greece) – meanwhile the rest of the world doesn’t cease to exist:

  1. SINGAPORE – when the Prime Minister of Singapore warned of a “rough landing” in China last wk, our research team was buzzing about it – they should have been; Singapore is a leading indicator for Global Growth – and Singapore’s Exports for JAN just dropped to negative y/y! (-2.1% vs +9.0% DEC). Chinese Growth is slowing – I sold my China Equities (CAF) long (bought it in DEC) yesterday
  2. OIL – never has Oil trading > $100/barrel not slowed both US and Global Consumption Growth. Maybe this time is different. Maybe it isn’t. Brent Oil busting to new highs this morning on a weak US Dollar and institutional performance chasing squarely focused on buying inflation protection.
  3. JAPANESE YEN – biggest currency drop not discussed by consensus media, maybe ever – and ever, as you know, is a long time. The Yen is literally straight down for the month of FEB. Down 4% is a monster move for a major currency. I think this is front-running the Sovereign Debt Maturity spike that’s pending in March. When I was saying this about the Euro breaking down hard in April 2011, that was the early signal too…

Covered SPY short at 1341, and re-shorted it into yesterday’s close. I think we keep making lower long-term highs vs 1363.









GMCR: Green Mountain Coffee was raised to “Buy” at Dougherty & Co.  The twelve month price target is $80 per share.




COSI: Cosi declined 2.9% on accelerating volume yesterday.





PFCB: P.F. Chang’s was upgraded to Outperform by RBC.  The price target was raised from $37 to $45.


KONA/PFCB:  Kona COO Larry Ryback has resigned from the company and will leave by March 2012 to take up the post of COO of P.F. Chang’s Bistro division.


BJRI: BJ’s restaurants reported EPS of $0.34 versus consensus $0.32.  Comparable sales for 4Q11 increased 5.1%.


DRI:  Darden was reiterated “Buy” at UBS.




TXRH, PFCB, DRI, EAT, CBRL, & DIN: All gained on accelerating volume yesterday.  PFCB traded at 4.5x average volume following earnings.  We are bullish on the stock.





Howard Penney

Managing Director


Rory Green



Cognitive Strain

This note was originally published at 8am on February 03, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“With the fearful strain that is on me night and day, if I did not laugh I should die.”

-Abraham Lincoln


In one of my favorite books, Team of Rivals, by Doris Kearns Goodwin, you get an introspective sense of Lincoln as a human being. To me, his greatest leadership quality was being a realist. That’s different than being an optimist.


If I wasn’t optimistic about my family, partners, and firm, I wouldn’t have invested most of my net wealth into building this company. It wasn’t easy committing free-market capital that could fail during the thralls of 2008. But I wouldn’t have done this if it was. The fearful strain that we bear, night and day, is the most important part of who we are and what we create.


In Chapter 5 of “Thinking, Fast and Slow”, Daniel Kahneman explains the difference between being at Cognitive Ease and experiencing Cognitive Strain. “Cognitive strain is affected by both the current level of effort and the presence of unmet demands.” And “easy is a sign that things are going well – no threats, no major news, no need to redirect attention or mobilize effort.” (page 59)


Easy is as easy does. There is nothing easy about being a leader in this country who has to deal with this market and meet a payroll every month. Don’t ask a talking head or a politician in America about that. They have no idea what it means to sit in this seat every morning embracing the uncertainties of whatever risks the next central plan brings.


Back to the Global Macro Grind


I’m personally experiencing Cognitive Strain this morning – I have to deal with being short the SP500, the daily dirty laundry list of threats to my company’s competitive position, and whatever this power-ball ticket on the US Employment Report brings at 830AM.


And I like it …


There’s no whining in winning. No matter what you throw at my senior management team every morning, we’ll suck it up and turn that into our own positive momentum. There a plenty of good teams in this business. Only the great ones get how to work together.


Back to this short SPY position.


What do I do with it this morning if the employment report is better than expected? What do I do if it’s worse?


Actually, the answer to those 2 questions is precisely why I have the position on – under both scenarios I know exactly what I am going to do. These are the risk management setups that we spend hundreds of hours preparing for. Very infrequently do Short Selling Opportunities like this present themselves with these odds.


That doesn’t mean the market is going to blow up. All it means is that my probability-weighted setup won’t get me run-over if I am wrong. No one ever went broke booking a gain either.


Across my three core risk management durations (TRADE, TREND, and TAIL), here are the scenarios I’m looking at:

  1. SP500 goes up – I wait and watch for 1333, and short it again there (lower long-term high)
  2. SP500 goes up, and up – I wait and watch for 1363, and short it again there (lower long-term high)
  3. SP500 goes down – I wait and watch for 1318 to hold – if it does, I book the gain – if it doesn’t I smile

It’s really not that complicated. There really is no Cognitive Strain associated with the SPY position itself. My personal strain tends to be cumulative. It occurs when everything else about running my company hits me from all directions at once, and then – bang! A central planner says or does something that I didn’t see coming.


I’m not alone in this country thinking about stress this way. I’ll bet that 100% of small business owners agree with me on this. How do I deal with Cognitive Strain perpetuated by the Bernankes and Geithners of this world? Follow me on Twitter, and you’ll figure that out in a hurry. “If I did not laugh,” I’d hand in the keys to this Made in America company to Wesley Mouch.


My immediate-term support and resistance lines for Gold, Oil (Brent), EUR/USD, Shanghai Composite, and the SP500 are now $1721-1779, $110.84-112.36, $1.30-1.32, 2282-2344, and 1318-1333.


Best of luck out there today and enjoy watching some Red, White, and Blue Leadership on the field on Sunday,



Keith R. McCullough
Chief Executive Officer


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