Changes on the Margin
We’re seeing some notable changes in our sentiment monitor following the most recent short interest release. WMT, HBI, GIL, CRI, JCP, KSS, M and LIZ scores are among the most notable.
As for retail overall, short interest remained relatively unchanged since the prior release on Feb. 9th. We saw the greatest changes out of Large cap retail (-0.2% PoP) with less meaningful changes out of the small and mid cap names. While sales sold short in mid cap retail increased 0.40%, it was driven entirely by a 1.8% increase in short interest for CROX. Likewise, small cap interest remained relatively unchanged with the only notable deviation out of JNY (-0.12%). In large cap retail, short interest increased the most for LOW(+1.5%), SHLD(+0.7%) & TGT(+0.3%) while JCP(-1.3%) experienced the most short covering over the past 2 weeks. Short interest as a percent of float accounts for 50% of a company’s overall sentiment score in our calculation.
Company callouts (see charts below).
1) Wal-Mart is sporting a 62 on our Sentiment Monitor (0 = investors are very negative, meaning that it is a bullish indicator. 100 = investors are overly positive, meaning that it is a bearish indicator). This is WMT’s lowest level since we started this index.
2) On the opposite end of the spectrum, Macy’s broke 80 on the upside, marking the most positive sentiment we’ve seen out of Macy’s – ever. We still think that this name will be impacted as the mid-tier (where it competes on the fringes) gets increasingly price competitive.
3) HBI and GIL are sitting between 60 and 70. It’s not the positive sentiment that surprises me as much as the fact that it has not changed meaningfully since each of them printed results. Sentiment should be much much worse. We still like them both on the short side.
4) Carter’s sentiment is still in negative territory, but has definitely returned to a positive trajectory. This is a name we’d definitely press as sentiment climbs past economic reality (ie about now).
5) KSS is really taking it on the chin. After hitting a score of 90 as recently as six months ago, KSS is sitting around 55 today. It’s still too early to own that one. We think there’s more downside to go.
6) JCP puzzles us. Despite all the positive press around the analyst meeting, Ellen, and JCP getting the early jump on KSS, its negative sentiment has really not changed much over the past six months, and even year to date.
7) LIZ is above double digits in both stock price ($10.10) and sentiment. But the latter (a measly 12) has much more room to go – as does the stock.
Sentiment Framework Methodology
Our updated Hedgeye Retail Sentiment scorecard is published in conjunction with last night’s short interest release. As a reminder, we use our Scoreboard as a piece of our TRADE (Trade=3 week or less duration) framework. The sentiment scores combines buy-side and sell-side conviction measures (Including Buy/Sell Ratings & Short Interest as a percent of float); we standardize those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. The idea is that a contrarian strategy can be employed at the extremes (positive extreme >90, negative extreme <20) to screen for names that provide the opportunity for the greatest upside relative to the consensus view. A sentiment score above 90 (overly bullish) has proven to be a good historical ‘sell’ signal, while a signal below 20 has proven to be better to Buy. We recognize that some names may break into the 90+ or 20/below thresholds and won’t immediately trade contrary to consensus. In fact, companies like Nike & LIZ have remained in the high/low bands over extended period of times. While our sentiment monitor acts as an excellent screening tool at major inflection points, we incorporate additional tools/analysis (SIGMA, Management Scorecard, etc.) to properly contextualize fundamental opportunities across all durations. Some stocks will never break out of their band, but marginal directional changes matter. We have back tested these levels for our group and the result can be seen below. Note that the analysis below was performed using the ~100 companies included in the monitor when the framework was initially created.
In an effort to provide additional context and compliment a company’s sentiment score, we also focus on insider transactions in conjunction with shifts in buy/sell side sentiment to gauge the overall conviction on a particular name. For additional detail on the methodology behind our proprietary sentiment measures or historical detail for a specific company, please contact the team. Below, we have included FL as an example as well as the historical trends in sentiment by retail subsector.
The short interest is showing a lot of pain for the bears in QSR. In casual dining, the shorts are piling into Brinker.
The top quality QSR names continue to win people over; SBUX and MCD saw a reduction in short interest as a percentage of float for the two weeks ended 2/15 despite short interest in the two stocks declining to 0.9% and 0.7%, respectively.
The most recent data, released last night and reflecting the short interest level as of the settlement date 2/15, shows that the QSR space remains intimidating for the bears. This is not surprising given the hiring trends in QSR and the resilience of many QSR businesses through dire economic conditions. Casual dining is typically far more vulnerable in such downturns and, given the concern around increasing gas prices and the hyper-competitive discounting environment in the industry, it is understandable that the shorts might focus their attention on that category before turning to QSR.
Below is our sentiment scorecard. MCD, YUM and SBUX continue to reign supreme and EAT and PFCB continue to struggle to attract any love whatsoever from the investment community. We have been positive on EAT for 18 months and have been positive on PFCB for just over one month.
QSR CALL OUTS
- CBOU and THI saw upticks in short interest over the most recent two weeks of data. CBOU reported a strong 4Q but it seems investors in the stock were ahead of it and sold on the news. THI is up 9% month-to-date, most of that coming on the back of strong earnings on the 23rd. The fact that coffee costs are coming down is bullish for this space
- MCD and SBUX are so high on the sentiment scorecard; short interest is so low, that any miss versus expectations could lead to sizeable decreases in their respective stock prices. As yet, we are not seeing any deterioration in the fundamental outlook for those companies
CASUAL DINING CALL OUTS
- CBRL short interest is rising as gas prices go higher
- EAT short interest gained during the first half of the year but the stock has bounced back strongly over the last three days; we think some shorts are covering here. EAT has had a great run, and investors are likely to wait for further evidence from the management team that the turnaround is continuing before pushing the stock substantially higher. We continue to like the name, especially relative to competitors like DIN and RT, but have other longs higher on our list (JACK, PFCB & YUM)
- PFCB is squeezing the shorts and, with short interest as a percentage of float at just under 20%, there is plenty of room for more bears to capitulate if the fundamental outlook continues to improve on the margin.
- CAKE guided down 1Q12 EPS and that hurt the stock.
- BWLD ran over the shorts and caused a reversal of the prior trend of increasing bearishness in the name.
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But hard to get excited about a flat 2012.
As management said on their last conference call, don’t expect much from 2012. We get that their focus will be on long term prospects for the Company and opening up the rest of their Resorts World development. However, we don’t see why those goals are mutually exclusive. Market growth will be an issue in 2012. Even though this message isn’t exactly new, the Street is still modeling 8% EBITDA growth for 2012 while we are estimating a decline of 4% with RWS EBITDA of just over $1.6BN.
While we are concerned about the near term, the longer term story for Genting Singapore is brighter. Namely, the company will likely be announcing a significant project in the second half of 2012. They are no longer geographically restricted in their investment universe since their sister company has used its dry powder towards Genting Resorts NY and a potential large development in Miami. Genting stated that the equity investment size would be between S$500-750MM (total ballpark project size of~S$2BN).
Genting Singapore would likely not develop in the Philippines since there is a Resorts World property already there. We believe that Japan is too far away from approval to announce a capital raise. Therefore, our best guess is that the new project will be in Vietnam. During the ASEAN conference in September 2011, Vietnam was listed as one of two future opportunities for new development. If Genting can generate similar returns to the 28% ROI generated on RWS in its first full year of operations with an incomplete property, we believe that a new announcement should serve as a positive catalyst for the stock.
Meanwhile, the longer term outlook for RWS is quite positive. We believe that the Marine Life Park & Aquarium should contribute close to S$300MM of revenues and over S$85MM of EBITDA to RWS by 2014. While harder to estimate, the contribution from an additional 175 VIP rooms at Equarius and 22 villas should also help drive VIP growth given the lodging capacity constraints at the property and market. The likelihood of junket approval, even if more tame than the Macau breed, should also help VIP growth in the future. For all of these reasons, we believe that EBITDA of S$1.8BN could be a surmountable hurdle in 2013.
Q4 FOLLOW UP
Based on our conversation with Genting management we have made the following modifications to our observations of 4Q11 from what we wrote on 2/27/2012 in “GENTING BLOWS IT.”
We estimate that gross gaming revenue (“GGR”) was S$903MM
- VIP gross revenue of S$467MM and net VIP revenue of S$286MM
- Rebate rate of 1.33%
- Slot and mass table revenue down 5% QoQ, with slot up QoQ and up on a win per unit basis and mass table down
- Gross mass table revenue of S$275MM
- We estimate gaming points were S$50MM or 3.9% of our estimated drop
- Estimated drop of S$1,375MM and win of 21.7%
- S$162MM of revenue from gaming machines (slots & EGTs)
- Estimated handle of S$3.38BN
- S$258MM of rebates, GST & gaming points
- Gaming taxes: S$84MM
- Estimated fixed expenses: S$186MM
Based on last quarter’s results and the benefit from high hold in 2011, we have a hard time seeing how the company will manage to grow EBITDA in 2012. In 2011, RWS VIP held at 3.34%, which we estimate boosted net revenues by $200MM and EBITDA by $190MM, assuming that normal hold is 3%. Hold at RWS since opening has been 3.19%.
- S$2,561 of net gaming revenue
- Net VIP revenue of S$974MM
- RC volume of S$62.4BN and hold of 3%
- We’re modeling declines in 1H12 followed by 10% growth in 2H12
- RC volume of S$62.4BN and hold of 3%
- Rebate of 1.3%
- Our numbers don’t assume any benefit from junkets getting approved even though Genting is optimistic that junkets will be approved in the near future. Our understanding is that prior to the junkets getting approved, there needs to be an amendment made to the Casino Control Act which will define under what conditions junkets can grant credit to patrons. The CRA needs to draft this amendment and then it would have to be approved by Parliament. Therefore, If and when the amendment to the Casino Control Act goes to the Parliament floor, we will know that junket approval is right around the corner.
- Net VIP revenue of S$974MM
- Gross Mass table revenue of S$1.2BN and S$986MM net of gaming points
- Drop of S$5.55BN and 21.5% hold
- We’re modeling low-single digit declines in 1H12 and high single digit increases in 2H12. We believe that mass market is largely mature in Singapore and that RWS is being negatively impacted by the MRT stop which just opened by MBS
- Gaming points equal to 3.75% of drop
- S$581MM of slot win
- Non-gaming revenue of S$676MM
- S$164MM of room revenue
- 1525 rooms, 90% occupancy and S$298 ADR
- S$164MM of room revenue
- S$92MM of F&B and other revenue
- USS revenue of S$365MM
- 4.2MM visitors at an average daily spend of S$87
- Minimal Marine life Park & Aquarium contribution of S$56MM
- Assume a mid-3rd quarter opening
- 1.1MM visitors ramping to 4MM in 2013
- Average daily spend per visitor of S$52
- 2013 margins expanding to 25-30%
- Marine Life Park & Aquarium assumptions:
- As a point of reference, the only other Marine Park / Aquarium of comparable scale in Asia is Ocean Park Hong Kong, whose attractions include a marine mammal park, oceanarium, animal theme park and amusement park.
- In 2007/2008 the park received 5.0MM visitors, more than the 4.5MM visitors to HK Disneyland.
- RWS USS had 3.4MM visitors in 2011, however, not all of the rides were fully open until the end of the year. We estimate that visitation in 2012 should hit 4.4MM.
- The cost of admission to Ocean Park HK is HK$280 (S$46) for adults and half that amount for children between the age of 3-11 which compares to a HK$399 (S$66) for adults and HK$285 for children (3-11).
- USS Sentosa is priced at a S$2 premium (roughly in-line) with HK Disney.
Conclusion: We expect a good Q4 out of FL Thursday. With heightened anticipation over Hicks’ new long-term strategic plan to be unveiled at next week’s analyst day we don’t expect near-term momentum to slow just yet. That’s a consensus call, but we think the consensus is right.
TRADE (3-Weeks or Less):
We’re at $0.55 for FL on a comp assumption of +8% for the quarter headed into Thursday’s print, which is ahead of the Street at $0.51 and +6.5% respectively. The latest NPD data which is a component of our (statistically-valid) comp predictive model, supports our above consensus view.
- Sales held in at a MSD rate in January to end the quarter up +7% in the Athletic Specialty channel outpacing the total industry. As a result we have increased our comp expectations by 1pt to +8%.
- In light of sales coming in stronger at quarter end, we have increased our GM estimates to 100bps over last year driven by +80bps in occupancy leverage and +20bps from merchandise margin.
- The modest upside in merchandise margin reflects a sequential deceleration in light of the change in promotional cadence and store events that were lapped in Q4.
- We expect SG&A to come in up +6.5% yy in Q4 reflecting +8% core growth spending offset in part by $4-$5mm in Fx benefit.
TREND (3-Months or More):
We’ve had 10% comps over the past year, 40% EBIT growth, and seven consecutive quarters of improvement in the sales/inventory spread. It’s worth noting that over this precise seven quarter period, FL has beaten every quarter by a weighted average of 32%.
Growth will slow on the margin as FL faces increasingly tougher comps in the 1H in addition to slower growth out of Europe limiting significant upside surprises to earnings over the intermediate-term.
TAIL (3-Years or Less):
Hicks delivered on his 5-year plan 3-years ahead of schedule. The company is hosting an analyst meeting next week on March 6thto outline its new strategic plan. We expect the focus to remain on the next leg of improving apparel assortment and mix, growing the international store footprint (more productive than domestic base), and expanding its digital platform one part of FL’s business that we think is truly underappreciated.
We expect the company to earn $2.35 in F13 and generate mid-teens earnings growth over the next 2-3 years. That gets you a low-to-mid $30s stock. If Hicks throws out goals of 10% EBIT margins as expected and sales/avg. sq. ft. of $450+ and $6.5Bn in sales, investors will start looking at $2.75 in earnings power, and a $40 stock. We’ll see what’s unveiled next week.
We’re still not sold.
“There appears to be little or no equity value in Caesars' core business given the ugly financials. Yet the IPO prospectus shows Caesars carved out its online business, including the World Series of Poker, into a separate unit unencumbered by debt. This means Caesars equity holders should get - all the online profits; hence the investor focus.”
- Andrew Barry, Barron’s
In the Barron’s article “Is Caesar’s a Sucker’s Bet”, journalist Andrew Barry suggested that the online carve-out explains the post-IPO stock pop of CZR. Before suspending disbelief, investors should consider several important points.
- Barring a massive recovery in its core business, CZR is likely to remain cash flow negative for the foreseeable future. There is a high likelihood that this company will need to restructure (maybe another bankruptcy) its balance sheet at some point down the road.
- Federal legislation now looks a lot less likely than a month ago since the “Barton Bill” did not get tacked on to payroll tax extension as many hoped. There is still hope that HR 2366 will get tacked onto a piece of must pass legislation this year (e.g. Highway Bill), although the odds look slim. An online gaming market developed through the State route will take longer to develop and be smaller in size.
- Barring a spin-off of Caesar’s Interactive, any profits (which are minimal at the current time) coming from this business will go into the general pool of cash used to pay CZR’s massive interest obligations of $1.6BN on debt of $23 billion.
- A spin-off of Caesar’s Interactive poses material tax consequences for both Caesar’s Entertainment and its shareholders unless they can effect a tax-free spin under Section 355
- While it is true that Caesar’s Interactive has no debt, that doesn’t mean that it is truly “unencumbered.” CZR’s secured lenders at the operating company and CMBS entity have upstream guarantees secured by stock in Caesar’s Entertainment Corporation (CEC) and thereby an indirect claim to anything that CEC owns. If a spin-off occurs, and debt holders don’t receive consideration for their stake, they have a strong case of fraudulent conveyance should CZRs eventually file. Even if no filing occurs, there are likely to be lawsuits brought by debt holders to either prevent a spin-off or to get a piece of the proceeds.
Since the hope of Federal legislation has begun to fade, the stock has plummeted 40% off its highs. Still at $10.54 per share CZR is valued at 12x our 2013 EBITDA estimate- a far cry from being reasonably priced.
- A slight premium to Wynn which has much higher quality assets, an option on Cotai, more development opportunities in Asia, and happens to return a large amount of cash to shareholders
- A slight premium to LVS which has Sands Cotai Central opening in less than 2 months, much higher asset quality, and more attractive growth opportunities
- A 2x premium to MGM, which also has better quality Strip assets, a casino in Macau and an option on Cotai, and an option on US online gaming through its Bwin.Party agreement
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