Q1 should be decent but performance past the opening of SCC will be key



Galaxy should eke out a small beat this quarter.  However, what investors really care about is Galaxy’s ability to hold its own against SCC.  We know that Galaxy’s market share remained high for the first two weeks after the opening of SCC.  If volumes hold up, the stock’s recent momentum should continue, barring a big VIP slowdown.


As we wrote about on April 24, 2012 in "SCC NOT IMPACTING LVS SHARE YET," SCC has not yet boosted LVS’s share. Meanwhile, Galaxy’s share is chugging along at 20-21%, in-line with their share in March.  To be fair, it’s still too early to tell what kind of impact SCC will ultimately have on Cotai.





We project that Galaxy will report HK $2,028BN of EBITDA and gross revenue of $13.2BN with Galaxy Macau holding a little high and Starworld a little low.


Galaxy Macau

We are estimating Q1 revenue of HK$7.143BN and Adjusted EBITDA of HK$1.204BN.  

  • Gross gaming revenue of $6.9BN
    • HK$5.05BN of gross VIP win
      • RC Volume of HK$170.7BN
      • Hold:  2.96%
      • During the first 3 quarters of operations, Galaxy Macau’s average hold rate was 3.2%.  Therefore, we consider this quarter's hold rate normal.  
    • Mass win of HK$1,530MM
    • Slot win of HK$296MM
  • Net non-gaming revenue of $265MM
  • Rebate & commission rate of 1.28% or 43.3% or HK$2.19BN
    • We assume 60% of VIP business is revenue share-based and 40% is RC-based
  • Gaming premium of HK$32MM
  • HK$119MM of non-gaming related direct expenses
  • Fixed costs of HK$918MM


We estimate that Starworld will report revenue of HK$5,580MM and Adjusted EBITDA of HK$786MM 

  • Gross gaming revenue of $5.46BN
    • HK$4.8BN of gross VIP win
      • RC Volume of HK$176.4BN
      • Hold:  2.74% compared to a hold of 2.91% (excluding this last quarter) since opening
      • Using Starworld’s historical hold rate, gross VIP win would be HK$325MM higher and EBITDA would have been HK$46MM higher
    • Mass win of HK$562MM
    • Slot win of HK$70MM
  • Net non-gaming revenue of $117MM
  • Rebate & commission rate of 1.25% or 45.5% or HK$2.2BN
  • Gaming premium of HK$15.5MM
  • HK$29MM of non-gaming related direct expenses
  • Fixed costs of HK$420MM

Other stuff

  • City Club contribution of HK$42MM
  • Construction materials revenue of HK$423MM and EBITDA of HK$105MM
  • Net corporate costs of HK$110MM

Tough Spot: SP500 Levels, Refreshed

POSITIONS: Long Utilities (XLU), Short Industrials (XLI), Basic Materials (XLB), and SPY


Any time I’m short and the market is remotely against me, I get questions. Right now, I’m getting the most questions I’ve ever had. With Growth Slowing and the US Dollar in free fall again (down 6 of the last 7 weeks), that makes sense. This is a tough spot.


The other big short-term reasons why this is a tough spot are: 

  1. Month-end markups – that can last until midday on Monday when the fun cops start watching (last day of April)
  2. iQe4 expectations – at this point, I really have no idea what the next product upgrade looks like, or if it’s coming
  3. Immediate-term TRADE resistance is higher at 1409 

In other words, we can easily take the elevator up, every hour, on no volume, up to 1409 and make lower-highs. And then take the windows, again, on the way down.


Tough spot. Such is life for those of us who still expect to win and lose.



Keith R. McCullough
Chief Executive Officer


Tough Spot: SP500 Levels, Refreshed - SPX


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




  • “We expect to build additional product momentum that will generate further quarterly sequential growth in the second half of our fiscal 2012”
  • “We signed a sales agreement with a major multi-site customer with 1,500 new units to be shipped through the calendar of 2012 to replace and upgrade a portion of their slot floors.”
  • “We continue to gain traction in our growing network gaming business as we've successfully expanded our unique WAGE-NET networking gaming solutions to approximately 900 gaming machines at more than 50 casinos around the world…and our goal remains to have installations in 100 locations worldwide by the end of our current fiscal year.”
  • “Player's Life Web Services recently surpassed 800,000 unique user log-ins.”
  • “With additional jurisdictional approvals on a number of new Participation games, including THE WIZARD OF OZ Journey to Oz, BATTLESHIP, and the Pirate Battle, as noted in our last quarterly call, combined with initial approvals for our new Epic MONOPOLY game, which we received approval right at the end of December quarter, as well as the expected commercialization of additional new Participation products in the second half of fiscal 2012, we expect to install a number of these new themes consistent with our previous expectations, which should enable us to improve both our install base and our average daily rate in the second half of fiscal 2012.”
  • “We remain focused on taking additional costs out of the Bluebird xD and the Bluebird2 cabinets through continuous improvement actions and we expect to realize margin improvements in the second half of fiscal 2012 through these ongoing initiatives. “
  • “We expect to achieve expected cost savings in the second half of fiscal 2012 consistent with our previous expectations, which will result in improved operating leverage in the second half of fiscal 2012.”
  • “We have approximately $161 million remaining on our repurchase program and just over 55 million shares outstanding.”
  • “Overall, we anticipate that customers' capital budgets will continue to result in only limited improvements in industry replacement cycle in calendar 2012, but we will benefit from an increased demand from new casino openings and expansion.”
  • “We expect to realize additional improvement in ship share in the second half of our fiscal 2012 as we continue to introduce new products with differentiated gaming experiences and new math models.”
  • “We expect to generally receive a fair share in these new openings, likely averaging in the high-teens.”
  • “We also expect additional incremental demand in fiscal 2013 from VLTs in Illinois, at racetracks in Illinois and Italy, coupled with the replacement cycle for VLTs in the Canadian provinces.”
  • “ In Alberta, the lottery authorities expect to replace and upgrade their entire installed base of 7,000 VLTs. They've begun this process by announcing their intent to replace an initial 2,000 VLTs, and WMS was selected to replace 25% of these units. We currently expect to ship these units in the first half of our fiscal 2013, and in addition, we'll earn software revenues for future development and game sets. Other Canadian provinces, including Manitoba and Saskatchewan, are also in the process of evaluating VLT replacement initiatives, and we look forward to hearing their final decision within the coming months.”
  • “In our Gaming Operations business, we expect to see improvement in our installed base and daily average revenue in the second half of fiscal 2012 through further jurisdictional approvals and the commercialization of additional new Participation products. I believe our product development pipeline for the second half of fiscal 2012 is among the broadest and most competitive that we've brought to market and includes unique and differentiated new games, such as CLUE, Life of Luxury Deluxe, Aladdin & The Magic Quest, GONE WITH THE WIND, Super Team and Monster Jackpots featuring the classic Universal Studio's monsters, along with several additional game themes for refreshing existing series and form factors.”
  • “With the CLUE game, we will be partnering with Caesar's for the game's planned launch anticipated at the end of the March 2012 quarter.”
  • “We've got about 1,900 games in our queue right now in our backlog, which is about a quarter and a half – we install about 85 to 100 a week.”
  • Gaming operations: “We would like to end the year kind of flattish where we were – where we ended the last year. And that would be a good thing heading into 2013 with momentum and product, again coming out in the first part of 2013.”
  • “We're likely to spend about the same that we did last year because we really started the process of changing out the Bluebird1s to Bluebird2s and Bluebird xDs in earnest in our fiscal 2011. So that number is going to be somewhere in the $65 million to $70 million range. Next year, that number should go down a bit, because we'll have changed out the brunt of it in fiscal 2011 and fiscal 2012.”
  • “So continue to look for additional cost reductions” [in SGA]


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We thought that the quarter was strong ex-EMEA which was clearly a significant disappointment given -1% comps for that division versus 2.3% consensus.  The two-year average trend for Starbucks' comps declining in all geographies corroborates Keith's recent view that growth is slowing. Given that the stock was up 34% YTD versus the S&P 500 up 11% when the number hit the tape, the sell-off was merited in our view.  Management is, in our view, trying to manage investor expectations for the remainder of the year, raising FY12 guidance but failing to lift it in line with the Street's expectations.


*         Europe is a problem and the company's actions - sending Michelle Glass to London - indicate that they are taking all steps possible to turn things around. It will not happen overnight and the macro environment will likely remain a headwind for some time given deep recession in U.K. referenced by management.

*         Looking into FY13 and the company's position of strength in single serve, its new concepts and beverage lines, and the strong returns being generated by capital investment, there is plenty of fodder to construct a compelling bull case

*         Commodity costs turning from a headwind to a tailwind in FY13 should be a meaningful benefit, particularly in CPG where in 2QFY12, commodity pressure accounted for 620bps of 740bps total margin

UGG: Does The Punishment Fit The Crime?


There’s a lot wrong with DECK right now, but we don’t think it’s terminal.  Revenues were weak and they missed. Bad news. We get it. We’re not trying to gloss over the issues. But 24% of the float is short, and it still is giving up $650mm in market cap today – or about a quarter of equity value and 32% of Enterprise Value? Seems pretty steep.


The question with UGG (over 90% of cash flow) is always ‘is the brand dead?’ And yes, this is always the (seasonally weak) time of year people ask it. No doubt, with inventories up an average of 100% over the past 2 quarters, there’s clearly more weight to the question today than in past years. But consider the following…

1)      Do these stories ALWAYS have to be binary? Why do people view them as either the greatest thing since Nike, or dead in the reincarnation of Heely’s? Can there be something in between where good brands can exist for a long time? Yes. Especially those that have already proven that they can successfully grow beyond US borders.

2)      As it relates to inventory, we need to account for about an incremental $100mmm yy.

  1. $10mm for new stores. Keep in mind that inventory will naturally accelerate as UGG grows its consumer direct model.
  2. $20mm to grow its new European business. Inventories will be heavier up front.
  3. $10mm in cold weather product that has been sold for delivery in later quarters.
  4. $40mm in higher sheepskin costs. UGG is likely to recoup at least some of this in pricing.
  5. $20mm in spring inventory – supporting new product rollouts (i.e. some of which are using alternative materials).  

3)      Let’s put this in perspective. In looking at retailers for the better part of 15-years, if there’s one thing I’ve learned is to rarely beleive a management team’s reasons as to why they have too much inventory.  It’s an easy (and unverifiable) spot to make excuses. But as it relates to leftover inventory from this (aberrational) winter, as well as higher product costs – I am willing to give them a pass right there on over half of the inventory growth.

4)      They’re 95% done with pre-orders – especially strong in men’s and kids (ie less dependent on the sheepskin-laden classic) and are introducing more alternative fabrics without (reportedly) shifting away from identity.

5)      When all is said and done, let’s say that you squarely believe that the UGG brand IS on a decline. We’d challenge you to talk to any wholesaler, and find someone tell you that they’re comfortable not placing reorders on UGGs for this fall and winter. If the brand is still in demand, and a wholesale buyer does not have the goods, then they’re probably out there looking for a job.


We’re coming out at $4.85, $6.05 and $7.10 for 2012, ’13, and ’14, respectively. With $6.80 in cash on hand, we’re looking at 9.4x, 7.5x and 6.4x earnings over those durations. Valuation is by no means a catalyst. But sentiment is low (24% of the short is float), seasonality is out of favor, and you have to wait to fall in order to get a reacceleration in the business. But keep in mind that the ‘there’s no catalyst for 2-3 quarters’ argument is the top bear case I hear. From a risk management perspective, we’ll rarely be early on a name like this. But for someone that wants to stomach near-term noise and look out a year, this looks like a good risk/reward. Sometimes, herd mentality that there is no catalyst is, in itself, a catalyst.


Brian P. McGough
Managing Director


UGG: Does The Punishment Fit The Crime? - DECK snagit



(F12 Outlook post Q4)

Full-Year 2012 Outlook

  • Based upon current visibility, the Company expects full year revenues to increase approximately 15% over 2011 levels. (now +14%)
  • The Company expects full year diluted earnings per share to be approximately flat with 2011 levels (now down 9%-10%) due primarily to the increase in sheepskin costs in 2012 compared to 2011, which the Company projects to adversely impact profitability by approximately $1.40 per diluted share. This guidance assumes a gross profit margin decline of 200 basis points (now -250bps) from 2011 levels due to an increase in costs of goods sold, partially offset by selective price increases, an increased contribution from retail sales, and the addition of the Sanuk brand for the full year. This guidance also assumes SG&A as a percentage of sales of approximately 29%.
  • Fiscal 2012 guidance assumes approximately $13 million, or $0.23 per diluted share, associated with the amortization and accretion expenses related to the Sanuk acquisition.
  • Fiscal 2012 guidance also assumes that the Company’s effective tax rate will be approximately 31%. 
    • UGG up +10% (was 11%)
    • Teva +low-to-mid single-digit (was +10%)
    • Other down -15%
    • Sanuk still expected to be ~$90mm


  • Sanuk continues to outperform - strong sell-in of the spring line equally strong in March/April
    • Brand making progress building distro with retailers incl JWN, Zappos, Journeys, & DDS
  • UGG spring styles were up meaningfully yy
  • Cold-weather boot sales the big offset
  • Sheepskin up 40% in 2012 yy, but coming down from highs
  • Spring styles up 20% in domestic wholesale channel
  • Fall close to closing pre-book, pleased with level of commitment from domestic wholesale
  • Open to buy dollar pool has contracted, but based on conversations with retailers, mgmt believes UGG maintaining share
  • Consumers will see new fall collection as early as June/July (new sneakers, casuals and boots)
  • Closing some accounts that can't display full offering, increased net independent door counts in 2011
  •  Int'l sales of UGG in Europe lower than expected - UK DECK's biggest int'l mkt
  • Still ramping marketing spend in Europe to build awareness and expand product line
  • Goal to develop slippers, cold weather, casuals, men's and kids like in the U.S.
  • Benelux (2nd biggest mkt) had very good Q1 - difference to UK is more mature distributor partners that can offer broader assortment
  •  Asia UGG business grew at a fairly rapid pace in Q1 - wholesale cont. to rebound in Japan vs. tsumani yy
  • Have recently taken minority interest in JV to capitalize on China opportunity
  • Total store comps flat vs. Domestic comp up HSD in Q1 offset by down Int'l comps
    • US regional comps:  Northeast hit hardest
  • e-commerce down -7.5%: Teva up strong offset by HSD decline in UGG
  • Teva posted strong domestic wholesale growth + dom. e-com. Offset by Int'l down
    • Closed-toe product up 38%
    • Due to over-inventoried position at retail, not seeing orders in near-term impacting fall demand = taking down projections for the year.



"UGG Brand's primary selling season at retail typically doesn't get underway until later in the year, hitting peak velocity in November and December."



  • Will not know what 2013 prices look like until they lock in prices for fall '13 line in October
  • Skeepskin is a by-product of the meat industry
  • Sourced primarily from Australia with some from the UK and US
  • Decline in herd sizes driving up price
  • Drought in Australia also a factor
  • Fx also a headwind
  • Are seeing prices starting to decline
  • Believe other companies have shifted to other materials (out of the market)
  • Published price of skins not only factor in DECK's cost:
    • Use higher grade skins
    • Tanneries in China another factor that carry additional costs
  • Trying to offset this to some extent with non-sheepskin product


GM: -403bps

  • ~300bps due to higher product costs
  • ~200bps due to markdowns, closeouts, discounts and DTC mix
  • Offset in part by Sanuk and increased pricing
  • Increased closeouts attributable to discontinued Spring/Fall styles
  • Teva and Other brands and UGG closeouts cause for results below expectations (~-200bps)
  • Sanuk brand margins came in ahead of expectations


SG&A: +36% ($35mm)

  • +$8.7 related to Sanuk acquisition
  • +$4.7mm in marketing (UGG men's and classic campaigns)
  • Addition of 19 new stores LTM


Store Growth:

  • Expect to have 70 at year end vs 46 now
  • 27 stores in comp (18 in US, 4 in UK, 4 in China, 1 in Japan)
    • Of 19 non-comp stores many in Asia and are 1/3 smaller with lower sales/store
    • In addition to infrastructure investments behind store rollouts, this is why store productivity appears to be declinnings
    • Sales/sq.ft. comparable in Asia
  • Additions: 24 store opening left in 2012; 4 in U.S. and 10 each in Eur and Asia



  • Up +95% yy to $209mm due to:
  • Primarily fall UGG product ($90mm), product costs, and addition of Sanuk brand ($12mm)
  • Of $90mm increase in UGG inventory:
    • $65mm fall inventory ($50mm in classics and slippers) have orders for this at full price
    • $10mm in cold weather product that has been sold for delivery in later quarters
  • Can also look at by:
    • $40mm in inventory product cost increases
    • $20mm in European inv to support direct business
    • $20mm spring inventory
    • $10mm new store inventory


  • Cash position $228.6mm




  • Lower projections for Int'l wholesale and Teva domestic sales
  • Total revs now +14% (was +15%)
    • UGG up +10% (was 11%)
    • Teva +low-to-mid single-digit (was +10%)
    • Other down -15%
    • Sanuk still expected to be ~$90mm


  • GM: -250bps (was -200bps) - lower int'l sales and increasing Q1 closeouts
  • SG&A: ~30% of sales (was 29%)
  • Tax rate: ~31%
  • CapEx: ~$80mm (was ~$90mm) - $32mm to new HQs, $26mm new stores, $10mm IT & maintenance, $4mm retail operating systems, $8mm corp infrastructure



  • Revs +8% - added pressure from European business
  • GM: ~43%
  • SG&A 63% as % of sales
  • EPS: -$0.60





UGG Inventory Levels:

  • Most inventory on-hand has been committed for fall - mostly classic product no fashion element


Biggest Changes since last Qtr:

  • Seasonality, weather has profoundly impacted how retailers are buying cold weather product - from one extreme to the other
  • Kid's and men's has done very well, really seasonal product weakness


Gross Margins:

  • Closeout impact fairly equally split between Teva & Other brands and UGGs
  • Channel mix also impacted margin


Order Book:

  • ~95% done with prebook
  • Especially strong in men's and kids - less dependence on traditional classic
  • Have done a good job mitigating sheepskin impact with alternate designs - shifting to more fashion
    • Has allowed DECK to offer lower price points, retailers receptive
  • RED FLAG: no longer offering Fall/Winter backlog (was up +15% last qtr), now just reporting full-year due to addition of Sanuk
  • ASPs up slightly in order book


International Business Outlook:

  • "Feel really strong where we're headed with our retail business and where that's going to end up for the year"
  • Int'l expectations have come down from up over 20% and 33% of sales - now more like +15% (Domestic expectations up)
  • China is all direct, no wholesale.
  • Seeing improvement in Japanese business
  • Have good visibility now with most of European orders pre-booked. Reduced expectations to a level believe achievable.


Spring Product:

  • Typical split between carryover product vs. spring product roughly 40/60 (ballpark)
  • Spring up close to +20%



  • More growth expected in Q4 than Q3
  • European distributor disruptions lowering expectations in Q3


Cost of Skins:

  • Not fully locked in for 2013 yet, waiting for killing season in Q3



  • ~60% of business in 1H
  • Expect good growth in Sanuk in Q2





In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

OVERALL:  SLIGHTLY BETTER - Adding back the write-off, BYI reported $0.69 cents vs. the Street at $0.67. Gaming ops were the bright spot in the quarter with game sales and systems more or less in-line.  


Here is the report card evaluating actual results against management's previous assertions.  

    • SLIGHTLY BETTER:  Increased the low end of FY 2012 guidance by 12 cents to $2.37-2.45.
    • SLIGHTLY BETTER:  BYI's margins increased 3% YoY and QoQ - which we would categorize as a little better than slight sequential improvement.  On the flip side, next quarter's margin will slip slightly QoQ. The goal achieving of 48-49% in the next few quarters remained unchanged.
    • SAME:  Progress in Australia remained sluggish, but their QoQ shipments did increase.
    • SLIGHTLY WORSE:  While BYI finally has the finish line of approvals within their sight line, the delay in approval will cost them some VLT placements as their concessionaire partners grow tired of waiting.    
    • SLIGHTLY BETTER:  "GREASE" reached an install base of 127 units (currently 170 units in the field), with better than expected initial performance.  Though early, cannibalization impact was relatively low.  Also, "Michael Jackson" deployment is ahead of schedule.  BYI continues to believe that 700-800 games in the field for each title remains achievable.
    • SAME:  Systems outlook remains rosy with a solid backlog.
    • SAME:  Moving along exactly as planned. Will recognize go-live revenues in FQ4 2012.  BYI is already recognizing some service revenues

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