Bullish call. One time items held back Q4 (corporate expense). 2012 setup looks very favorable.



“2011 was a year in which we achieved many goals: operationally, strategically, and financially.  Operationally, we enhanced our customer experience through targeted reinvestment in our properties and improved relationships through our M life customer loyalty program. Strategically, we acquired a majority interest in MGM China and began expanding our brand presence in key markets throughout the world, particularly Asia.  Financially, our revenues and margins have improved year over year increasing our cash flow and strengthening our financial profile. Going forward we expect to build off of these strategies to grow our company and maximize shareholder value.”


- Jim Murren, MGM Resorts International Chairman and CEO



  • Better then expected FIT and leisure booking led to better than guided to RevPAR
  • Believes that as MGM improves their balance sheet, great benefit will accrue to shareholders
  • This past week they launched M Life for their non-gaming amenities across their resorts and launched their new website. Thinks that this will be a big driver for their Las Vegas business
  • Excited about their strategic relationship with ASCA, extending their reach into the regional markets. Will have more of these types of relationships to report in the coming quarters
  • Think that MA will be a great potential market for them
  • They are looking at other regional markets where they can invest small sums to increase their database and leverage their brands to the benefit of their Strip properties
  • They will have a Bellagio on the Bund in Shanghai. Have a property opening in Beijing and Chengdu later this year
  • Feel that they are in as good position as anyone if / when online gaming happens in the US
  • Continue to manage their expenses. MGM Grand YoY improvement was largely due to better group mix.  
  • Group mix was 14.7% in the quarter
  • Leisure and FIT segments are up 9% in the 4Q
  • Casino trends continue to improve and international volumes continue to improve
  • 4Q domestic rated play also improved
  • Saw volume and win increases in both tables and slots for the first time since 2007
  • MGM Detriot had its best quarter and year since opening
  • $113MM of capex and $12MM in MGM China this quarter
  • Expect to spend $350MM excluding MGM China in 2012
    • Room remodel at MGM Grand
    • Room remodel at Bellagio
    • Conversion / start of Michael Jackson show
    • Blue Man Group show
  • Corporate expense higher than usual. One time costs regarding outsourcing their IT costs. Expect their corporate expense to moderate and to be in the mid $30MM in the 1Q12
  • 1Q12 Guidance:
    • D&A: $235-240MM
    • Interest: $274MM ($24MM in amortization and $6MM from MGM China)
    • Stock comp: $10MM
  • Lowered interest rate and extended maturity through the refinancing at CC
  • Closing of facility redo in a week or 2, expect a reduction of borrowing costs of roughly 150bps
  • CityCenter:
    • Aria: Casino revenue increased 27%, hotel revenues increased 24%. Slot revenue increased 21% YoY.
      • Benefited by $6MM in high hold
      • Room revenues benefited by higher % of convention room nights
      • 100% of their planned convention room nights are already booked for 2012
      • Negotiating to have the Cirque show to be replaced with Michael Jackson
      • They are updating some of their dining options
      • Will host the Michael Jordan golf tournament in March
    • Crystals: 86% leased. D&B mens and women's stores opened this year. Channel's swimwear store opening soon
    • Total monthly lease revenues of $751,000; 405 units
  • MGM China
    • 2 new Junket operators opened this quarter
    • RC grew 29%
    • Mass drop grew 13%
    • Slot handle grew 35%
    • $45MM of capex in 2011 and $85MM in 2012 ($45MM will build out some undeveloped space on the second floor)
    • Cotai plan: 500 tables, 1600 rooms and costs about $2.5BN
  • Seeing great returns on the room remodel at Bellagio and MGM Grand
  • The event calendar is a big driver of visitation for them
    • Mayweather - May
    • Pacquiao - June
    • Madonna
  • The first quarter will be the toughest ADR comp, but think that RevPAR will be up 2-3% and then improve throughout the year - especially in the 2nd quarter. 



  • Resort fee helped them by a few percent in 4Q, but that's largely anniversaried at this point going forward.  Excluding resort fees, they would have been up just over 10%. Cash ADR was up 8.6% in the quarter.
  • MGM Grand margins - flat year over year? Impacted by room renovations
  • Bellagio hold was up YoY but held well.  Was hitting on all cylinders
  • MGM China - impact of SCC opening?
    • Feel like they will be able to sustain their positions. Will be interesting to see how the other properties on Cotai will do.
  • Flow through worse in 4Q?
    • Due to seasonality 4Q is never as good as 3Q. 48% flowthrough is one of the best flow-through levels that they've had.  Part of that is lower occupied room nights in the 4Q than other quarters.
  • I-poker?
    • Several options at the Federal level - there are still several pieces of key legislation that need to be passed
    • Murren thinks it will be passed at the Federal level this year
    • States are also "fervently" working on their own legislation and they are prepared for that scenario although they prefer Federal legislation
    • They will be one of the first horses out of the gate when something passed
    • Champions for Federal approval in the House?  No comment - but he does think that there is broad based support in the House as well as the Senate, which views this as a key law enforcement issue.
  • Additional levers to reduce leverage? 
    • More FCF as property improves
    • Cash from trust in NJ with the sale of Borgata ($180MM)
    • Additional dividends from MGM China
    • CC will also be a deleveraging JV
  • Projecting same convention room mix as what they ended in 2011 for 2012 with better in the year for the year bookings.  2013 and 2014 looks incredible strong so far.  Same bodes for Aria. 
  • When will they get some meaningful contribution from international hotel management hotel contracts?
    • They are already starting to make money in China - MGM Grand in Sanya just opened. Get $1000/night over CNY
    • They also have Brandco - getting $30MM from fees from MGM China vs. just $12MM last year
  • Think that their high end properties will continue to perform well through out the year
  • Gaming is coming back in Vegas.  Table play is coming back and slot business is strong.
  • Think that 2012 will see a more broad based recovery at their properties not just on the RevPAR side. 



  • Wholly owned resorts:  "The overall table games hold percentage in the fourth quarter of 2011 was near the high end of the Company’s normal range of 19% to 23% and was near the low end of the Company’s range in the prior year quarter.  Slots revenue increased 3% compared to the prior year quarter."
  • MGM China's Board announced a $400MM dividend which will be paid to shareholders of record on 3/9/12 and distributed on 3/20/12. MGM will receive $204MM of the dividend
  • MGM China:  "The increase was driven by year-over-year increases in volume for VIP table games, main floor table games, and slots of 29%, 13% and 35%, respectively. VIP table games hold percentage was slightly above our expected range of 2.7% to 3.0% in the current and prior year periods"
  • CityCenter: "Aria’s table games hold percentage was approximately 240 basis points higher in the current year quarter compared to the prior year quarter"
  • "In December 2011, the Company borrowed an additional $778 million under its senior credit facility to increase its capacity for issuing additional secured indebtedness. As a result, the Company had a higher than normal cash balance at December 31, 2011 of $1.9 billion, which also included approximately $720 million of cash and cash equivalents related to MGM China."
  • Debt: $13.6BN including $3.3BN drawn on the R/C. In January they repaid the $778MM borrowed in Dec of the R/C and had $957MM of available borrowing capacity
  • "As previously announced, the Company is seeking amendments to its aggregate $3.5 billion senior credit facility to, among other things, extend the maturity of loans held by consenting lenders from February 21, 2014 to February 23, 2015. Lenders holding approximately 62% or $2.2 billion aggregate principal amount of the credit facility have elected to extend the maturity dates of their commitments. Extending lenders will receive a 20% reduction of their previous credit exposures, unless waived by such lenders. In addition, extending lenders’ loans will be subject to a pricing grid that decreases the LIBOR spread by as much as 250 basis points based upon collateral coverage levels and the LIBOR floor on extended loans would be reduced from 200 basis points to 100 basis points.  The closing of the amendment is subject to customary closing conditions and is expected to occur by the end of this month."

TJX Q4 Callouts

TJX reported Q4 results in-line with its recent preannouncement of $0.62 vs. $0.62E this morning. While there isn’t a whole lot in terms of surprises to report re the P&L, TJX’s SIGMA move is the clear highlight ahead of the call at 11am with sales outpacing inventories and margins expanding – a shift worth noting and bullish relative to the rest of the companies that have reported over the last two days (see our note "Retail:Tuesday's Foursome").   

Here are some callouts from the release regarding Q1-to-date trends and F13 expectations:

1)     Inventories:

  • Sales growth +11% outpaced inventory growth up +7% (down -5pts seq) for the first time in 5qtrs
  • On a per store basis inventories were up +3%, less than expected
  • The company’s purchase commitments are down yy putting TJX in the driver seat as it relates to excess inventory that will be coming into the discount channel from the mid-tier providing a tailwind to the discounters (e.g. TJX and ROST).
  • “Inventoriesare lean as we begin the year, which positions us very well to flow fresh spring merchandise to our stores.”

2)     Outlook:

  • Outlook in-line with expectations with upside likely in Q1 based on Feb-to-date trends.
  • “We enter a new fiscal year with considerable momentum in our business and are off to a very strong start in 2012. With favorable weather patterns in February, comp store sales are trending toward a 7% increase for the month.”
  • Q1 Outlook $0.45-$0.47 (vs $0.46E) predicated on comps +2%-4%. (up +7% so far in Feb.)
  • F13 Outlook $2.21-$2.31 (vs $2.27E) predicated on comps +1%-2%; including $0.07 from 53rd week

3)     Repo:

  • Company spent $400mm to repurchase shares in Q4;  expects to spend $1.2-$1.3mm in repo’s in F13 accounting for 5% of outstanding shares. New SRA up to $2Bn

4)     Home Category:

  • TJX’s HomeGoods posted a +10% comp matching TJX Europe as the strongest performers this quarter consistent with yesterday’s commentary re strong performance out of the Home category from WMT, M, and HD.

TJX Q4 Callouts - TJX


Casey Flavin





In preparation for ISLE's FQ3 2012 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • Completed the sale of Grand Palais Riverboat, Inc. including the smaller of the Company's two riverboats in Lake Charles to Bossier Casino Venture LLC for $15 million.  Concurrent with the sale the Company has consolidated its operations onto the remaining larger riverboat and will operate with 1,262 slot machines, 40 table games and eight poker tables.


  • "We will finish interior upgrades to the Grand Palais Casino in Lake Charles in the middle of December and are finishing completing the designs for the refurbishment of our Lake Charles Hotel."
  • "We've already commenced the re-brand of our Vicksburg facility to our Lady Luck brand, a $4.5 million project that we expect to be substantially completed shortly after the end of our fiscal year. We are also pleased with our progress in Cape Girardeau and are approximately one year away from our anticipated opening day."
  • "We expect capital expenditures of around $60 million in the last half of the year with approximately half of that going in Cape Girardeau."
  • [Davenport] "We are currently still having conversations with the city's preferred developer, although that process has slowed.  As a result, we have opened up that process to have conversations with some other potentially interested parties."

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The ICSC chain store sales index remained consistent with modest spending growth and continued seasonal volatility.  Last week, the index gained 3.0% (4 week moving average is now 0.7% vs -0.4% last week), reversing the prior week’s -2.0% decline. Year-over-year improved modestly to 3.2% from 2.8% (4 week MA improves to 3.4% from 3.3%).  Unusually warm weather and Valentine’s day helped to offset rising gasoline prices.


Comments from CEO Keith McCullough


Finally, Top 3 Most Read (after Greece at #1) = Oil Rising at #2 and China Slowing #3 – the rest of the world didn’t cease to exist!


  1. GROWTH – pick your overnight economic data point, from German PMI slowing sequentially in FEB to 50.1 vs 51 JAN to Taiwan Exports dropping -8.6% y/y in JAN, I think we’re just getting started here. What happens on the margin m/m matters most. Inflation, from these levels, slows growth.
  2. INFLATION – Italian CPI +3.2% y/y JAN (stagflation), India CPI pops to +7.7% JAN vs 6.6% DEC, and Hong Kong CPI up to 6.1% JAN vs 5.7% DEC –these are all JAN numbers that don’t include this rip in the CRB Index, Oil, etc in FEB.
  3. YEN – complete meltdown on our immediate-term TRADE duration w/ the Japanese Yen in free-fall, accelerating to the downside this morning to 80.16 vs USD. At the same time, short-term UST’s are spiking above my TREND line of 0.26% and 10s are above the critical 2.03% line this morn. Big sov debt maturity spike in Japan in March.

Got Sov Debt risk in Japan and the USA? Just when everyone stopped thinking running deficit and debt levels like this didn’t matter? These are risk mgt questions that don’t have tidy answers, unfortunately. I get paid to ask them when markets do.






THE HBM: PZZA, CAKE, TXRH - subsecotrs




PZZA: Papa John’s reported 4Q EPS of $0.65 versus $0.62 consensus.  Comps missed, coming in at 1.7% versus 4.3% consensus for North American system-wide comparable sales.  EPS guidance for 2012 was reaffirmed $2.33-2.43 versus consensus $2.44.




JMBA: Jamba gained +6.1% on accelerating volume yesterday.




CAKE: Cheesecake Factory reported a low quality beat.  Favorable tax and an extra week were essential to the $0.53 4Q EPS number versus $0.52 expectations.  The outlook for unit growth was also altered as some opening dates have been pushed out.  The guide down for 1Q and lack up guide up on the full year, despite raising FY12 comp guidance, were the two main points that drove the stock down post market.  See our CAKE post from this morning for further details.


CAKE: Cheesecake Factory was reiterated “Buy” at Sterne Agee.  The PT remains $36. 


TXRH: Texas Roadhouse reported 4Q EPS of $0.18 versus consensus $0.16.  Comparable restaurant sales came in at +5.6% in 4Q.


THE HBM: PZZA, CAKE, TXRH - txrh pod1







CBRL: Cracker Barrel gained 4% on accelerating volume yesterday after strong earnings before market open.

KONA: Kona continues to get hit on strong volume.





Howard Penney

Managing Director


Rory Green




The premarket look at the stock is down 5%.  We think this price is a good opportunity to buy the stock for a trade.  The intermediate and longer term TREND and TAIL, respectively, is less certain.  Many questions remain around sales and margin trends in 2H12.


As the industry fundamentals continue to improve (benefiting from better weather) putting up a clean quarter is a must in this environment.  In this context CAKE did not deliver on the 4Q11 numbers.  EPS benefitted from a favorable tax settlement and an extra week also added approximately $0.05.  While CAKE will never be a comp store sales story, the top line performance was strong.  Comps were +2.7% including 1.7% traffic and 1% average check.  Despite comps coming in 70 basis points above expectations, the lack of flow through meant that the targeted EPS growth could not be achieved without the help of an extra week.


CAKE: INVESTORS SAY “SHOW ME” - cake vs icsc


CAKE reported $0.53 adjusted EPS versus consensus of $0.52 but neither our model, nor consensus we believe, was anticipating how the company would reach that target.  The 4Q11 results are reminiscent of the CAKE of old, when the company could not seem to put it all together.  That is not to say that the concept is highly flawed but it is an expensive concept to execute consistently.


Some of the issues that stand out are:

  1. Guided 1Q12 EPS $0.34-0.36 versus $0.40 consensus based on 2-3% comparable sales growth.  Sales guidance for 1Q12 of $435-440 million negatively impacted by extra week in 4Q negatively impacting revenues. 
  2. Despite raising FY12 comp growth guidance range by 50 bps to 1.5-2.5%, EPS guidance was unchanged at $1.80-1.90. Higher labor costs are expected to impact margins along with impact of extra week in 4Q11.
  3. Revised FY12 U.S. openings from 7-10 to 7-8 due to third party issues and the openings have merely “shifted out a bit”, according to management.
  4. Pre-opening expense of $3 million in 4Q11 in support of two additional restaurant openings.  Who spends that kind of money on preopening costs?  Only CAKE!!
  5. 4Q results included an impairment charge of three previously impaired restaurants of 1.5 million. 
  6. A favorable settlement of a lawsuit filed against the IRS resulted in the company recording interest income of $719,000 and a credit to the tax provision of $1.1 million relating to the settlement.


The key question for investors in this stock is whether or not they believe that management will be able to deliver on FY12 expectations despite effectively preannouncing that 1Q will come in lower than many have been expecting.  As we progress through 2012, the compares on both the revenue and margin lines become sequentially more difficult. 


The company guidance of 2-3% SSS this far into 1Q12 suggests that the current trends remain in place.  2.5% comp growth in 1Q12 implies two-year average trends 30 basis points above 4Q levels.  The company will need to execute from a top line perspective with higher labor costs and tax rate (28-29%), offset by commodity cost inflation rolling off, set to negatively impact EPS growth this year.   ICSC chain store sales (chart above) are implying a slight slowdown in quarter-to-date numbers and we will continue to monitor this trend as the quarter progresses. 


The premarket look at the stock is down 5%.  We think this price is a good opportunity to buy the stock for a trade.  While the negative reaction to the quarter was not misplaced, we do believe that the company remains healthy.  There is a lot of uncertainty and investors will be seeking reassurance on the full year prospects during the next earnings call on 4/25. 






Howard Penney

Managing Director


Rory Green


Too Strong?

This note was originally published at 8am on February 08, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I would think we do a Quantitative Easing 3 if the Dollar gets too strong.”

-Larry Fink


Wow. Larry Fink is the CEO of Blackrock – they run $3.5 Trillion in client assets – and after a +101% move in US stocks from the 2009 low, he told Bloomberg yesterday that “investors should be 100% in Equities.”


Game on.


Fink is probably a good guy. We probably have a few things in common too. For one, we both started our careers at First Boston. He eventually ran their bond department. I eventually left.


Evidently, one thing that we do not have in common is the concept of Wall St 2.0 Global Macro Risk Management. There’s tremendous responsibility in being trusted with real-time recommendation. Time and price really do matter. With my own money, I’d never be 100% in anything – never mind stocks, after their best start to a year in decades.


The other thing Fink and I don’t have in common are political aspirations. He’d like to replace Geithner as head of the Treasury. I’d rather be a one-legged duck swimming in a circle.


When you consider the aforementioned currency quote within the context of where some of this country’s thought leaders are relative to my Strong Dollar = Strong America vote, Fink and I are not even in the same area code of having a debate.


Is my opinion Too Strong? After testing 40-year lows during Qe2 of last year, was the US Dollar Too Weak? Is Larry Fink’s view of arresting gravity and not letting America’s currency trade at its non-Fed intervention free-market price Too Strong?


So many critical questions. So little time left.


Back to the Global Macro Grind


With Santorum sweeping 3 states last night, President Obama’s probability of re-election (Intrade contracts) are going up and the US Dollar Index is going down. It sounds like Fink’s goal in advising Obama will be to keep the Dollar down. I guess if you’re in the business of seeing asset prices inflate, that makes some sense.


But does it make sense for American Savers and Consumers?


You tell me. I’m already telling you what I think. It’s no different than what I thought when Larry Fink was bullish on US Equities in February of last year. US Dollar Debauchery drives inflation. Inflation slows real GDP growth.


Now if you take Bernanke or the US government’s word for it, we don’t have inflation. Notwithstanding the fact that Bernanke cites a US inflation calculation that has been changed 9x since 1996, the “deflator” in this past quarter’s US GDP report was only 0.4%.


What does that mean?

  1. Q4 US GDP Growth for 2011 was reported at 2.75%
  2. Q4’s “Deflator” (you subtract inflation from the reported number for a real GDP #) was 0.39%
  3. With Consumer and Producer Price inflation running 10x that 0.39% “deflator”, US GDP was grossly overstated

I don’t use the word “grossly” very loosely. Neither does Clarium Capital’s Peter Thiel use the word “fraud” casually. Last night, like two non-Keynesian ships in the night, Thiel (founder of Pay Pal) and I were on separate sides of Yale University’s campus hosting spirited discussions with students and faculty about the alternative debate to currency debasement (he called Keynes a fraud).


Back to these feisty little critters called Inflation Expectations that slowed US GDP Growth in its tracks at 0.36% in Q1 of 2011 (yes, before the Europe that every guy who was wrong on his 2011 US GDP forecast by 60-80% blamed), here are some facts:

  1. US stocks haven’t had 1 down day of more than 0.57% in 2012 YTD (yes, stock prices are inflating)
  2. Brent Oil is trading at $116.35/barrel this morning = up +6.5% since Bernanke debauched the US Dollar on January 25th
  3. Gold has gone from $1622 on the morning of January 25th(pre FOMC statement) to $1749 this morning = +7.8%

If someone wants to explain to me that markets aren’t expecting the Chairman of the Federal Reserve to inflate, I’m ready to debate them in any public forum – any time, any place.


Russian stocks (driven by expectations of Petro-Dollar prices = Dollar Down, Oil Up) are up another +1.3% and up +19.5% YTD! Both the central banks of Australia and South Korea have come out in the last 48 hours and said no more rate cuts with inflation running higher. India, who is highly dependent on foreign oil, just saw its yield curve go back to flat as inflation expectations ramped.


I could (and do) go on, and on, and on about this … because the data that supports it does…


The bottom line is that people who get paid (including me because I am long Energy (XLE) and Gold) by inflation expectations rising are the same people who generally say there is no inflation.


Calling that out for what it is isn’t Too Strong. It’s called the truth. Respect and leadership in America isn’t allocated by your title. Its earned each and every day. There may be bailouts for people losing client capital. But there is no bailout for losing credibility.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, and the SP500 are now $1736-1766, $112.71-116.85, $1.30-1.32, $78.59-79.09, and 1327-1354, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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