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KSS: Resistance is not Futile

Don't give in to temptation to support this name on the guide-down. 


No major surprises in the KSS print. Guidance was well below the Street, but about in line with our model. We like KSS realistic approach to 2013 – a year that will be marred by price competition from JCP, TGT, AMZN, SHLD, M and WMT. 


Here are two major factors to consider...

1.  The base business simply is not growing, and this was in a decent year overall for he industry. 

  • E-commerce reached $1bn in revs growing at 39% for the year, which contributed 1.5% to total top-line growth accounting for 70% of sales growth.
  • KSS’ total revenue growth in F11 was 2.2%.
  • If we assume e-commerce grows at a similar rate this year it would account for 2% total top-line growth; Guidance calls for 4.5% growth overall.
  • Backing into new store productivity contributions for Q4, new store growth accounted for 2% total growth this past year. 
  • That would imply that e-com and new store growth = +3.5% vs. total at +2.2% = core contraction

2. The sales/inventory spread (see our SIGMA) eroded the most in over four years. That said, we did not see a capitulation in Gross Margins - the combination of which is very GM-bearish. 


Resist temptation to buy on a sell off here. 


KSS: Resistance is not Futile - KSS SIGMA




Rice and coffee prices were the big outlier to the downside over the past week.  This is good news for PFCB and, particularly, the coffee companies like SBUX, PEET, DNKN, THI, GMCR, and CBOU.


The dollar showing weakness over the last week has coincided with strong price gains for most of the agricultural commodities that we follow.  Gold, oil and the XLE also posted strong year-over-year gains as the Federal Reserve continues to, as Keith wrote in this morning’s Early Look, “legislate inflation”. 







Gasoline Prices are creeping higher around the country with $4.00/gallon gas in California and media reports emerging of some gas stations demanding $6.00/gallon in Florida.  At some point, this will negatively impact consumer spending.









TXRH: We expect approximately 8% food inflation in 2012, primarily due to higher beef costs…on the beef side we do have fixed price – pricing arrangements in effect for over 90% of our beef costs in 2012.


CBRL: To the continued pressure on ground beef prices and other commodities partly offset by lower average dairy and produce prices, along with benefits from our supply chain initiatives, we expect cost of sales to increase 60 basis points to 80 basis points over 2011 to near 26% in 2012.


RUTH: We project 2012 beef inflation to be between 5% and 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August of 2012, which represents an approximate 7% premium compared to the prior years.


CMG:  While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans. Beef costs will be especially challenging due to protracted supply shortages, despite recent reductions in grain prices.


MCD: As we look at our guidance for 2012, we've built another mid-teens increase for beef, expecting that the dynamics in the marketplaces that we see, and are expecting, will continue.


SONC: One item to note is that we recently locked in our beef contract for calendar year 2012… given the potential for beef costs going even higher, which there are a lot of reports out there that speculate that could happen, that we chose to go with making this more of a known quantity here, and the idea of having a set price for the next 12 months, we feel like would be good for our business, adds some predictability to the business.





PEET: We expect 2012 coffee costs to rise 12% instead of last year's 42%.


SBUX: We've taken advantage of the recent declines in the C-price to lock in more of our coffee needs for fiscal 2013. We now have six months of our fiscal 2013 requirements secured at costs moderately favorable to 2012.





TXRH: The volatility around that 8% estimate for food cost inflation would really be driven by produce and dairy.  Those are of the biggest components that we float around the market, and that's about 15% to 20% of our total cost of sales.


CMG: While we're cautiously optimistic we'll see more reasonable prices in 2012 for avocados, dairy and produce, we expect these benefits will be more than offset by higher costs for our beef, chicken, rice and beans.







Beef prices are a significant input cost for many restaurant companies.  The chart of beef prices in the last section of this post shows that prices are now up 17.3% year-over-year, despite the fact that prices have been up year on year for over two years now.  TXRH said that it expects 8% food inflation in 2012 primarily due to higher beef costs.




Texas AgriLife Extension Service personnel, according to CattleNetwork, said that most of Texas received rain in the third week of February, helping to green up pastures and winter wheat.


Total frozen beef supplies were up 7% on January 31st, 2012 versus last year.


An investigation by the federal Canadian Food Inspection Agency has resulted in charges against a Manitoba veterinarian and livestock operators for illegally and intentionally exporting cattle in breach of U.S. and Canadian laws.

Canadian beef supplies have been shrinking since 2005 and are likely to shrink further in the short-term according to statistics released by the Canadian government Monday.  The Canadian beef cow herd is down 20% from its peak in ’05 despite shipments to the U.S. being down 24% in 2011 versus the year prior and cow slaughter rates being off 13%.  The numbers, according to CattleNetwork, do not add up.  The ag website does say, however, that the North American calf crop is down roughly 9% in the past 10 years. 


Analysts are expecting U.S. feedlots to have reduced cattle purchases in January as supplies of available animals declined.  On Friday, the USDA will release inventory estimates at 3 p.m.




The lead February contract in overnight electronic action hit an all-time high of 129.05 cents, surpassing Tuesday’s 128.97 top and indicating strong demand.


Cattle in the Chinese region of Ningxia Hui were found to have foot-and-mouth disease.







Coffee dropped significantly as stockpiles climbed and producers sought to increase sales in Brazil, the world’s top grower. 


Coffee inventories monitored by ICE Futures U.S. have jumped 24% since the end of October. 


Brazilian permits for exports February to-date surged 26% versus January, according to Cacafe, Brazil’s Council of Coffee Exporters.




Coffee speculators decreased their net-long position in coffee futures in the week ended 2/14. 



Chicken Wings - BWLD




Total frozen poultry supplies on January 31st, 2012 were down 11% year-over-year.


Brazil may boost broiler-chicken production by 3% to a record 13.25 million metric tons in 2012 versus 12.9 million in 2011, according to the USDA.  The increase is down from an earlier forecast of 5% growth in production. 


The six-week moving average egg sets number declined sequentially from -5.46% for the week ended 2/11 to -5.49% for the week ended 2/18.  This is a bullish data point for chicken wing prices; supply is not showing any sign of picking up quickly and beef costs remain at extremely high levels.


WEEKLY COMMODITY CHARTBOOK - egg sets vs wing prices






























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings















Howard Penney

Managing Director


Rory Green



The broader retail industry is set to benefit from significant weather-related tailwinds in the 1Q numbers.  350 basis points of an 8.9% quarter-to-date comparable restaurant sales number at PNRA has been attributable to weather, according to a recent earnings call.  HD's 4Q comp of 6.1% was helped by a tailwind of 200-250 basis points.  Here we examine one metric, snow coverage, both nationally and by selected regions, in order to contemplate just how significant the 1Q weather sales lift might be and which restaurant companies may benefit most.


Nationally, as the first chart shows below, 1Q to-date has seen far less snow coverage than during the same time period in 2011.  The average 1Q to-date coverage across the United States so far this year was 28.54% versus 48.41% last year.  Additionally, on the weekends, as the second chart below indicates, the difference between 2011 and 2012 was consistent with the total picture.  This is important as weekends are crucial to restaurants from a traffic perspective.


WINTER WONDERLAND - snow national


WINTER WONDERLAND - snow national weekends



Below we have broken out three regions, the Midwest, the East Coast, and the South.  The National Operational Hydrologic Remote Sensing Center, the source of the snow coverage data, divides the country into many regions with some of the dividing lines running through State lines.  Therefore, in our conclusions as to which companies will derive the most benefit from weather differentials in the three regions we have decided to analyze, we are forced to approximate.  So, when we use “Midwest”, “South” and “East Coast” below, we are referring to the regions shown in this map and inferring as best we can which restaurant companies each region most pertains to.


WINTER WONDERLAND - nohrsc regional breakout



In the Midwest, as the first chart shows below, 1Q to-date has seen far less snow coverage than during the same time period in 2011.  The average 1Q to-date coverage across the region so far this year was 16.45% versus 51.19% last year.  Additionally, on the weekends, as the second chart below indicates, the difference between 2011 and 2012 was consistent with the overall picture.  Again, we are checking this because weekends are so important to restaurants in terms of traffic.  PNRA and BWLD are two companies with significant percentages of their system in this region.  It is difficult to reconcile the regions assumed in the snow coverage data with actual state lines but we estimate that PNRA and BWLD have roughly 30% and 45% of their system units in this region, respectively.  During its recent earnings call, BWLD was asked about the weather impact on its 1Q to-date performance (+12.9% comps) but management did not address the topic. Considering the high level of exposure the company has to the Midwest, and the data shown in the charts below, we contend that the impact of weather on BWLD's top line has likely been significant.  CBRL is another concept heavily exposed to the Midwest, with roughly 35% of its system in the region.


WINTER WONDERLAND - snow midwest


WINTER WONDERLAND - snow midwest weekends



In the Eastern Coastal region too, as the first chart shows below, 1Q to-date has seen far less snow coverage than during the same time period in 2011.  The average 1Q to-date coverage across the region so far this year was 2.65% versus 19.61% last year.  Additionally, on the weekends, as the second chart below indicates, the difference between 2011 and 2012 was consistent with the overall picture.  Again, doing our best to reconcile the regions in the map, above, with state lines, we believe that RT and PNRA should benefit from the improved weather this year with roughly 33% and 22% of their systems in the region, respectively.


WINTER WONDERLAND - snow east coast


WINTER WONDERLAND - snow east coast weekends



While it is strange to conduct research on snow coverage in the South, we believe that it will be meaningful for the restaurant companies that were impacted by last year's harsh conditions.  On Saturday February 5th, 2011, The New York Times ran a story with the headline, “Snow and Ice Paralyze Texas From Rio Grande to Oklahoma Border”.  In states such as Texas, where such weather is less common than in other areas of the country, we contend that its impact on consumers’ willingness to get in the car and go out to eat is likely severe.  As the first chart shows below, 1Q to-date has seen far less snow coverage than during the same time period in 2011.  The average 1Q to-date coverage across the region so far this year was 2.65% versus 19.61% last year.  Additionally, on the weekends, as the second chart below indicates, the difference between 2011 and 2012 was consistent with the overall picture.   PFCB and SONC are two companies that are set to see a 1Q benefit from this year-over-year improvement in weather in Texas.  PFCB has 32% of its Pei Wei units in Texas.  SONC and EAT (Chili's) have roughly 27% and 14% of their systems, respectively, in the Lone Star State.




WINTER WONDERLAND - snow south weekends



We are sure that restaurant companies will be less keen to discuss the weather as they have been in previous years.  PNRA was an exception during its earnings call a couple of weeks ago, highlighting the 350 basis point impact of positive weather impact as the company rolled over storms of 1Q11.  We expect benefits of similar magnitude for many of the restaurant companies – particularly those highlighted in this post – during this quarter.  In order to get specifics, however, we may need to wait until next year when weather is a headwind once again.




Howard Penney

Managing Director


Rory Green






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Covering SPY: SP500 Levels, Refreshed

POSITION: Long Financials (XLF), Short Consumer Discretionary (XLY)


Short green, cover red. That’s what we do within a proactively predictable trading range. Intermediate-term tops are processes, not points.


To be clear, the Quantitative Risk Management view is quite often different than the Fundamental Research View. Over the course of my career, I have learned to rely on both. Fundamentally, I think consensus is coming our way on inflation slowing growth. Today’s Sector divergence (Energy up, Consumer down) speaks plainly to $122/barrel oil’s anticipated impact on real (inflation adjusted) GDP growth.


Back to the Quantitative Risk Management view, here are the lines in my model that matter most: 

  1. Immediate-term TRADE overbought = 1363
  2. Immediate-term TRADE support = 1353
  3. Intermediate-term TREND support = 1273 

If 1353 doesn’t hold, I think we go lower, faster. If 1353 holds, I think we bounce, again, on low volume, to another lower long-term high.


Scenarios, probabilities, and ranges. That’s what we do too. The process hasn’t changed, time and price have.




Keith R. McCullough
Chief Executive Officer


Covering SPY: SP500 Levels, Refreshed - spx.02.22.12


Genting and Singapore market growth coming into question.



Adjusting for a whopping 3.9% hold, this quarter was quite a disappointment.  Combined with LVS’s relatively weak performance at MBS, Q4 confirms what we have suspected for a while now – that Singapore is no longer a rapid growth market, unless more rooms are added or junkets are approved.  Combined, the Integrated Resorts in Singapore grew GGR 12% YoY but declined 6% sequentially.  The lackluster 4th quarter results were not even that good since market hold was a record 3.6%, compared to an average of 3.0% over the last 2 years.  If the market held at 3.0%, the sequential decline would have been 14% and YoY growth would only have been 3%.  The lack of commentary of how spectacular January/CNY was this year by either IR suggest that 4Q results may be the new norm. 


Aside from disappointing results, the most interesting new news today was that Genting clearly has been doing some serious development work – including raising financing for a new project  which it will likely announce in 2H2012.  If we had to guess, the project(s) are in either Vietnam or S. Korea, since Japan legislation and approval is still a while away.  Of course the US is also a likely possibility, but we think that that is less likely.



Genting Singapore Q4 Detail:


While we have not spoken with Genting management yet, here are some of our preliminary observations on the quarter.  We estimate that gross gaming revenue (“GGR”) was S$899MM, which is in-line with management’s assessment of garnering 47% GGR share

  • VIP gross revenue of S$465MM and net VIP revenue of S$286MM
    • 52% of GGR and 44% of net casino revenue of S$645MM
    • RC volumes of S$12BN, down 26% sequentially and 44% YoY
    • Hold of 3.9%
    • Rebate rate of 1.32%
  • Gross mass table revenue of S$282MM and net mass table revenue of S$225MM
    • We estimate gaming points were S$47MM or 3.4% of our estimated drop
    • Estimated drop of S$1,375MM and win of 20.5%
  • S$152MM of revenue from gaming machines (slots & EGTs)
    • Estimated handle of S$3BN
    • Estimated win % of 5%
  • S$254MM of rebates, GST & Gaming points
    • GST: S$48MM
    • VIP Rebates: S$159MM
    • Mass gaming points: S$47MM
  • Non-gaming revenue of S$138MM
    • Hotel room revenue of S$34MM
    • F&B and other revenue of S$22MM
    • USS revenue of S$81MM
  • Total expenses of S$377MM
    • Gaming taxes: S$83MM
    • Estimated fixed expenses: S$185MM – in-line with 3Q11


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."

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.51%
  • SHORT SIGNALS 78.32%