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LVS IS THE PRE-OPENING KING

Nobody expenses ‘em like LVS.

 

 

Q2 is likely to tell us little about the ongoing cost structure of Sands Cotai Central (SCC) and LVS’s combined Macau operations.  As can be seen in the chart below, LVS has been aggressive in the past, to say the least, in terms of expensing costs into the convenient pre-opening expense line.  While some of pre-opening costs are inevitably recurring, companies and analysts exclude them from ongoing operations. 

 

With a very disappointing post-SCC top line, one would expect very weak margins.  However, given the flexibility with the pre-opening bucket, the only clear takeaway on future margins from the Q2 earnings release will be that there is no clear takeaway.  We are projecting only a net $45 million YoY increase in Macau property EBITDA for LVS in Q2, despite almost a full quarter contribution from the $1.5 billion SCC.  Moreover, over $30 million of that increase was at Four Seasons.  Given the additional investment, our overall Q2 Macau margin falls from 33.0% to 29.2%.  Of course, we have no idea how much LVS will allocate to pre-opening so the margin could be higher.

 

The chart below shows that pre-opening as a % of total capex has already exceeded Venetian and we haven’t even included the Q2 expense.  Obviously, there is precedent for an additional 3% to get to the level of Four Seasons which would imply an additional $40-45 million in pre-opening costs.

 

LVS IS THE PRE-OPENING KING - lvs34




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HedgeyeRetail COTD: Happy Anniversary Ron Johnson

JCP reached new 52 week lows today and is finally immediate-term TRADE oversold just 2 days prior to the 1 year anniversary of JCP’s biggest hire in history.

 

With the seismic shift in JCP’s pricing strategy that has left consumers scratching their heads coupled with underappreciated capital investment required to ultimately bring RJ’s vision to life, there’s little to support the stock here over the intermediate-term. It will likely be a while, perhaps a long while, before we revisit the $29.92 strike price at which RJ’s warrants are struck. Lucky for him, he has 5-years to get there. Unfortunately, investors typically operate under a far different duration.

 

Today, we wouldn't touch it on the long side until it is a mid-teenager. 

 

HedgeyeRetail COTD: Happy Anniversary Ron Johnson - RJ COTD

 


DURATION MATTERS FOR SBUX

Starbucks seems to be acutely aware of past mistakes and we do not expect management to repeat the mistakes that brought the stock under $10 in 2009.  We would not advise buying the stock at this point, however, given that the Street is likely too bullish on EPS for 2HFY12.  The longer-term story for Starbucks remains one of the very best in the space but the likely impact of near-term headwinds leads us to look elsewhere over the TRADE (three weeks or less) and TREND (three months or more) durations.

 

Starbucks CFO Troy Alstead took the stage today at the William Blair Growth Stock Conference.  Below are the primary takeaways of the presentation:

  • The company now expects $0.44-0.45 EPS in 3QFY12 and $0.46-0.47 EPS in 4QFY12 versus prior guidance of $0.45-0.46 and $0.46-0.48, respectively.  The Street, according to Bloomberg, is expecting $0.46 and $0.49 EPS in 3QFY12 and 4QFY12, respectively.  The revision in guidance is due to costs associated with the Bay Bread LLC acquisition.  Overall, the La Boulange acquisition will be $0.02 dilutive to FY12 EPS and will also dilute FY13 EPS.
  • Investing in La Boulange and Evolution Fresh is going to be a headwind to EPS going forward; there is a potential for capital needs to come in larger than expected given the distribution capabilities that need to be built out to cater for both brands on a national basis.
  • Starbucks see continuing weakness in the EMEA division.
  • Coffee is expected to be a tailwind in FY13

 

Conclusion


We would not advise clients to buy this stock at this point in time.  We have liked the name for over three years but believe that sentiment has gotten ahead of the fundamental outlook of the company.  Company guidance is indicating that estimates are too high for FY12 and increasing economic uncertainty in Europe could cause actual earnings to come in even lower than the guidance is suggesting.  

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


CHART DU JOUR: V-SHAPED THIS CHART IS NOT

  • Given the free fall of 2008-2009, these core metrics should be recovering faster
  • Table volume is making lower highs and slots have been consistently in the “slow growth” camp
  • “Return to peak EBITDA” analysis is a pipe dream.  Structurally, LV and most of domestic gaming appear permanently impaired.

CHART DU JOUR:  V-SHAPED THIS CHART IS NOT - STRIP


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