All ears will be on the commentary of SCC and the performance of MBS.  Fade the sentiment?



We think Q1 upside is expected by the buy side and with the opening of Sands Cotai Central on April 11th, the focus will be on the commentary surrounding the performance of the new property and the related impact on LVS’s existing Macau portfolio.  No doubt the spin will be positive but the reality is that it is way too early to determine the ultimate success of the property and level of cannibalization on existing operations.  In fact, if sentiment moves significantly one way or another following the release and conference call, a prudent strategy may be to fade that sentiment.


Sands is reporting Q1 results next Wednesday night and we are projecting $2.7BN of net revenue and $943MM of EBITDA.  Our estimates are 6% and 5% ahead of the Street on net revenue and EBITDA, respectively.  Half of the upside comes from our higher gaming market forecast for Singapore while the other 50% is concentrated in Macau.  Other 2012 stock drivers will be growth in Singapore – or lack thereof, approval of Lot 3, and new market opportunities (Japan, S Korea, MA, FL) – including the gargantuan Spain project.



Our estimate for Macau property-level EBITDA and net revenues is 7% and 5% above the street at $459MM and $1.433BN, respectively.  More specifically, we’re ahead of the Street on Sands and Four Seasons, and in-line on Venetian’s performance.  Sands played very lucky while FS and Venetian experienced normal hold rate on their baccarat play.  We estimate that EBITDA would have been $17MM lower if Sands held at its historical rate of 2.89%.




Venetian is projected to report net revenue of $763MM and EBITDA of $276MM, +2% and in line with consensus, respectively.

  • Net gaming revenue of $676MM
    • $269MM of net VIP revenue    
      • RC volume of $13.6BN (up 10% YoY) assuming 25% direct play and a hold rate of 2.86% (just slightly below Venetian’s historical hold rate of 2.92%)
      • Rebate rate of 89bps of 31% of hold
    • Mass table revenue of $343MM, up 25% YoY
      • Drop of $1.2BN and 28% hold
    • Slot win of $64MM
  • $87MM of net non-gaming revenue
    • $58MM of room revenue ($243 ADR/92% Occ/$223 RevPAR)
    • $19MMof F&B revenue
    • $40MM of retail, entertainment and other revenue
    • $29MM of promotional expenses
  • Variable expenses of $375MM
    • $311MM of taxes
    • $45MM of junket expenses assuming a commission rate of 1.21% (rebate + promoter expense )
    • $22MM of recorded non-gaming expense
  • $90MM of fixed costs, up 6% YoY but down from an estimated $96MM last quarter



We expect Sands to report net revenue of $358MM and EBITDA of $107MM, 8% and 17% above the Street, respectively.

  • Net gaming revenue of $350MM
    • $152MM of net VIP revenue    
      • RC volume of $6.7BN (down 19% YoY) assuming 14% direct play and a hold rate of 3.59%
      • Rebate rate of 108bps or 30% of hold
      • Assuming historical hold of 2.89%, net revenues and EBITDA would have been $32MM and $17MM , respectively
    • Mass table revenue of $152MM, up 12% YoY
      • Drop of $708MM and 21.5% hold
    • Slot win of $30.5MM
  • $7MM of net non-gaming revenue
  • $196MM of variable expenses
    • $165MM of taxes
    • $21MM of junket expenses assuming a commission rate of 1.39% (rebate + promoter expense ) or 39%
    • $4MM of recorded non-gaming expense
  • $50MM of fixed costs, up 19% YoY and flat QoQ

Four Seasons

We estimate $312MM of net revenue and $76MM of EBITDA, 23% and 6% above the Street, respectively.  On the surface one would assume that there would be more of the revenue growth dropping to the bottom line, however, almost all the growth is from low margin VIP business which has a ‘teens’ margin. 

  • Net gaming revenue of $302MM
    • $248MM of net VIP revenue    
      • RC volume of $12.8BN (up 225% YoY) assuming 16% direct play and a hold rate of 2.89%
      • Rebate rate of 95bps or 33% of hold
      • The historical hold rate at FS has been 2.69%
    • Mass table revenue of $42MM, up 26% YoY
      • $107MM drop and 39% hold
    • Slot win of $12MM
  • $10MM of net non-gaming revenue
    • $9MM of room revenue
    • $7MM of F&B
    • $6MM of retail, entertainment and other
    • Promotional expenses of $12MM
  • $210MM of variable expenses
    • $166MM of taxes
    • $35MM of junket expenses assuming a commission rate of 1.22% (rebate + promoter expense )
    • $6MM of recorded non-gaming expense
  • $20MM of fixed costs, up 3% YoY and flat QoQ



We project $819MM of net revenue and EBITDA of $429MM, 4% and 7% above consensus, respectively.

  • Net gaming revenue of $678MM
    • $240MM of net VIP revenue    
      • RC volume of $14.5BN, up 43% YoY
      • Hold rate of 2.9%
      • Rebate rate of 1.25%
    • Mass table revenue of $289MM
      • Drop of $1.3BN, up 30% YoY and 22.5% hold
    • $150MM of slot & EGT win
  • $140MM of net non-gaming revenue
    • $78MM of room revenue ($340 ADR/99% Occ/$337 RevPAR)
  • $82MM of gaming taxes and $44MM of GST
  • $255MM of fixed costs, compared to an estimated $253MM in 4Q           




We estimate that Venetian and Palazzo’s net revenues will be $351MM with EBITDA of $97MM, which are in-line and 8% ahead of Street estimates, respectively.

  • Net casino revenue of $114.5MM
    • Table revenue of $99MM
      • Drop of $536MM, up 12.5% YoY 
      • 18.5% hold
        • 18% is the average hold for the last 3 years
    • $38MM of slot win
      • $448MM of slot handle, up 10% YoY and 8.5% hold
      • Last year was a very easy comp for LVS with slot handle down 36% YoY as they cut comps too deep
    • Rebates of $23MM or 4.3% of GGR
  • $121MM of room revenue - $190 RevPAR (+7% YoY)
  • $137MM of F&B revenue
  • $21MM of promotional allowances or 15.5% of GGR
  • 10.5% YoY increase in operating expenses to $245MM – up 5% YoY and down $4MM QoQ



We expect Sands Bethlehem to report $118MM of revenue and $26MM of EBITDA, 15% and 12% above consensus estimates, respectively.

  • $107MM of gaming revenues
    • Table revenue of $31MM
    • $76MM of slot win
  • $11MM of net non-gaming revenue
  • $47MM of taxes
  • $46MM of operating expenses (+12% QoQ)


  • D&A: $198MM
  • Rental expense: $15MM
  • Corp and stock comp expense: $50MM
  • Net interest expense: $58MM


Not the highest quality quarter but guidance was better.



MAR remains our favorite hotel company for the long-term.  The stock has had a nice ride and could take a breather, but numbers look like they are going higher.  Absent macro deterioration – MAR more defensive but clearly not immune – the stock should continue to work over the intermediate and long term.


MAR’s Q1 results were slightly below our projections numbers but in-line with the street.  A low tax rate contributed almost $0.02 to the Q.  Here’s where the miss vs. our numbers came from: 

  • Base mgmt and franchise fees were $13MM lower (~5%)
    • Lower managed room growth – only 0.3% YoY vs. our estimate of 1.6% (3.4k less rooms were added to the system than we modeled)
    • Base fees were also negatively impacted by a $3MM reversal of fees from 2 contract revisions
  • Incentive fees were $8MM higher, up 18%
    • 29% of managed hotels paid incentive fees vs. 25% last year
  • Owned leased/other profits were in-line but revenues were lower – so basically it was in-line since top line doesn’t really matter for this line item.  We don’t know what the breakout was yet between fees vs. owned/leased
  • G&A was $3MM lower
  • The tax rate was 3.7% lower than guided rate and contributing almost $0.02 in EPS
  • Net interest expense was $7MM higher than we modeled but equity earnings loss was $4MM lower as well

Other stuff:

  • WW RevPAR was 6.8% - above the 5-6% guidance range
  • MAR bought back $150MM of stock or 4.2MM shares in the Q – we modeled $200MM
  • Provided YoY comparison on Autograph hotels for RevPAR
  • There were a lot more hotel “exits” this quarter than prior quarters – hence, lower net rooms growth 


  • Increased WW RevPAR guidance to 6-8% from 5-7%
  • Increased FY fee guidance by $15MM or 1%
  • Increased owned, leased corporate housing and other, net result by $5-10MM
  • Raised EPS guidance 5-6 cents
  • Upped capex guidance by $50MM
  • Increased EBITDA guidance by $10-25MM


Dollar strength over the past week pressured commodity prices, as the table below shows.  Corn is declining sharply and cattle prices are also yet to regain the ground lost since the “pink slime” scandal turned prices lower.  Over half of the commodities in the table below are now red in the year-over-year column.  We expect more red numbers in that column as we move through 2Q and into 3Q.  Coffee is the biggest decliner, which is a positive for the coffee players as they look to extend contracts with suppliers.  On the upside, the clear standout is chicken wings.  +125% year-over-year and headed higher.  We also think that the top-line was heavily boosted by weather in 1Q, declining from the 12.9% same-store sales growth in the first six weeks to 10.5% for the total quarter.  If 8.9% comps and +50bps COGS drove down margins year-over-year, what will ~20% COGS inflation and mid-single digit comps  do to margins?












WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.


BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.


CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.


DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.


SONC: We've seen a rising employment, declining unemployment – consumer confidence has improved somewhat, but at this point, I wouldn't say that we've seen a negative impact from gas prices that we can discern.







Supply: Arabica harvests in Brazil get underway in June and good weather during growing season is fueling speculation that the country will produce a large quantity of coffee this year.  The robusta harvest in the main coffee producing state in Brazil, have started harvesting this year’s crop.


Demand: Economic concerns, particularly, in Europe, have led to concerns about demand for coffee on a global scale. While emerging markets are increasingly driving demand growth, developed economies still account for a large proportion of coffee consumption and consumer confidence in those markets can impact coffee prices. 


Comments:  Falling coffee prices are good for company margins as long as demand is not falling so fast as to impact sales to a significant degree.  Starbucks has its coffee needs locked into fiscal 2013.  Peet’s has its coffee costs locked though 2012 at increasingly favorable prices throughout.  Last year was a difficult year for Peet’s from a cost perspective. 





Supply: Egg sets placements continue to contract at around the same rate, -5%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.  As the chart below shows, supply is not showing any clear signs of picking up.



WEEKLY COMMODITY CHARTBOOK - egg sets wing prices





















WEEKLY COMMODITY CHARTBOOK - chicken whole breast











Howard Penney

Managing Director


Rory Green



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Retail: What To Expect This Earnings Season

Conclusion: This should be one of the less eventful earnings seasons for the retail supply chain in quite some time. Expectations are in check, and management teams continue to have high hopes for a 2H margin ramp. They won’t back off of that pitch…until they have to later this year. The group is getting winded, with a 17x p/e on 23% consensus growth expectations, which is simply mind numbing. In this context, we like stories that have asymmetric factors that will allow them to work in any climate, such as LIZ, URBN, FINL, DECK, ANF, DKS NKE and RL. We don’t like names that will get stuck in the middle of the margin madness, such as KSS, JCP, HBI, GIL, CRI, M, TGT, SHLD and JNY.



Earnings Season for the Retail Supply Chain kicks off in earnest later this week with both Hanesbrands and UnderArmour showing their wares. We think that the broader take-away from this earnings season will be one of opacity and complacency – though it might not be fully apparent at the time. Companies have a great excuse in unfavorable winter weather, and little visibility into what the real underlying sales trends are in April due to the rather severe impact that the change in the holiday calendar is having on the top line. Specifically, Easter was on April 24thlast year, while this year it fell on the 8th. Given what we think is about a 3-week ramp of sales into the Easter holiday, the event definitely pulled sales forward into the month of March. As a result, companies who operate on a January – December fiscal calendar will recognize Easter spending in Q1 vs Q2 last year. We can argue anywhere from a 1% to 5% impact on sales results for March/April. The reality is that the companies are largely unaware of the actual magnitude of the shift either. But any kind of soft comps in April will probably be given a free pass by the market. In fact, we’d argue that it already has.


On top of the holiday calendar shift, the industry is at the tail end of a meaningful ramp in commodity costs that has the Street modeling a significant ramp in earnings growth in 2H12. That’s where we get concerned. People tend to forget that Gross Margins are not all about costs; there’s also a revenue/pricing component. Most retailers and suppliers are planning to keep lower commodity costs in 2H. But no few are banking on any peers breaking rank. JC Penney’s EDLP strategy will absolutely put Kohl’s on defense. That’s 12% of the apparel industry right there. What about Target, Sears, Amazon, Gap/Old Navy… The numbers start adding up. Margins are a zero sum game in this business. If prices come down, someone has to pay for it – either the brand, the manufacturer in Asia, the retailer, or the consumer. The only safe bet for us is that it probably won’t be the consumer.


To put some numbers behind the madness, consider the following…

a)      The current consensus earnings growth forecast for the next 12-months is 23%. We have not seen this kind of growth since we came off of recessionary earnings numbers in 2010.


b)      The market is giving this earnings growth a 17x p/e. We’ve only seen that kind of multiple five times in 3-years, but always at times when the group was still clearly under-earning. Who are we to say that it is NOT under-earning today? But to make this case, we need to see a considerable upshift in consumer spending alongside another decline in raw materials costs to push margins to new peaks. We don’t like that call.

Retail: What To Expect This Earnings Season - Consensus NTM Earnings Growth


c)       Revenue: 4Q was the first time in 3-years where revenue growth in retail was below 7%. Granted, it was on a tough comp vs the prior year, but the 2-year run rate has been stuck squarely at 10% for the past five quarters.

Retail: What To Expect This Earnings Season - 2


d)      EBIT Margins have been down for the past  three quarters by an average of about 50bps. The consensus is banking on a reversal in EBIT margins in 2H and in 2013. Such a sharp reversal would be the first time we’ve seen a non-recessionary rebound to that degree in well over five years.

Retail: What To Expect This Earnings Season - 3


e)      We’re going on six consecutive quarters where inventories are growing faster than sales. Maybe this supports the case for a sustained top line, but certainly not at the margin levels people are expecting in 2H.

Retail: What To Expect This Earnings Season - 4


f)       Without question, capex is on the rise. That’s not bad by any means, so long as the returns are ultimately there. But  the point is that the current run-rate of 3.4% of sales is likely to continue to creep closer to the 4% level – which crimps cash flow. Out of all these factors, this one concerns us least, as the space is largely sitting on too much cash anyway. That said, we think we’ll see an increasing bifurcation as to who can get a return on their investment and who can not.

Retail: What To Expect This Earnings Season - 5


g)      Here’s a notable callout. We all know that cost pressure is easing in 2H. But does everyone realize that we just saw container traffic pick up again after 10 months of being negative? Virtually 90% of the items we put on our bodies arrives into the US in a container. When costs are high, the industry pulled back order levels to keep margins in check. Now with costs planned to come down in 2H, we’re seeing retailers and suppliers get more aggressive with importing product. This plays into our concern about 2H Gross Margin risk.

Retail: What To Expect This Earnings Season - 6


Will management announce the elephant in the room on the earnings call next Tuesday?  They did not do so during a conference presentation three weeks ago. We believe they have to; at 20% of sales, the cost of bone-in chicken wings is too critical a factor for the company's EPS this year.  




Howard Penney

Managing Director


Rory Green



Ohio slippage shouldn’t stop the BYI train.



Even with the deferral of recognition of the Ohio units, BYI should still at least meet the consensus estimate for the quarter.  Our EPS and revenue projections of 67 cents and $232MM are in-line with consensus.  BYI will print their number after the close next Thursday. 


For those that have been getting our research for a while, you already know that we like BYI over the long and intermediate term.  Since we turned positive on BYI on October 6th (see our note, “BYI: WE’VE GOT THAT GOOD FEELING”), the stock has been on a nice ride up from $27.  Of course, with the stock up over 70%, they need to keep delivering for the stock to work from here.  While we’re not projecting a huge beat, a solid quarter and a favorable outlook shouldn’t disappoint investors who are in for the long term.



FQ3 Detail:


We’re projecting $81MM of gaming equipment revenue at a 44.5% gross margin.

  • 4,500 units
    • 1,000 international unit sales
    • 3,500 NA unit sales
      • 775 new unit sales, the majority of which were shipped to Revel.  Other shipments in the quarter should include:
        • Valley Forge, PA
        • Several Tribal expansion in Florida
        • Ohio casinos were shipped in the quarter but we do not believe that BYI will recognize revenues from these units until next quarter
      • 2,725 replacement units - The March quarter is usually a stronger replacement quarter than December.  We believe that replacement shipments in the March 2011 quarter for the market were just under 15k and estimate low single digit growth in replacements for the March 2012 quarter.  In the December Q, we estimate that BYI garnered 17% replacement share vs. 15% in the March 2011 quarter.  We expect their share to increase sequentially this Q.
  • ASP of $16.3k down QoQ but up YoY.  On the last earnings call the company cautioned that the high ASPs in the December quarter were driven by a high mix of Pro Curve games but that ASP’s going forward should be “more reminiscent of the prior two quarters.”
  • Margins on new game sales should increase sequentially as the December quarter was also negatively impacted by a high mix of Pro Curve units sold
  • $8MM of parts and other revenue

We’re projecting $58MM of systems revenue at a 70% margin

  • The opening of PH1 of Sands Cotai Central should provide a boost to revenues
  • Estimating 12% QoQ increase

We expect gaming operations revenue of $92.6MM at a 70% margin

  • March has always been a better quarter seasonally for BYI vs. the December quarter for gaming operations revenue
  • With the shipment of Greece units, we should see a tick up in WAP revenues
  • Another good quarter from NY lottery VLTs, benefiting from a full quarter of Resorts World NY at full capacity and continued growth in average win per day in NY, which were up 14% YoY this quarter

Other stuff:

  • SG&A: $61.5MM
  • R&D: $24MM
  • D&A: $6MM
  • Net interest expense: $2.5MM
  • Tax rate: 36.5%

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