We qualify the miss since someone held well in July.  Despite at least 4 sell-side downward revisions in October, we’re still below consensus EBITDA by 4%.



Thanks to Big Ben, this asset heavy, debt-laden company’s stock has held in pretty well.  Meanwhile, management has done a good job refinancing its substantial debt and saved some dough on interest expense.  Ah, but those pesky fundamentals.  The Strip is going backward, not forward.  Slot volume and non-Baccarat table play are moving in the wrong direction. 


The slots have us particularly concerned as you may have noticed.  We don’t agree with the commonly held perception that the Strip is stable.  Slot revenue is high margin and the trend is down, not up.  Q3 RevPAR will be down which was supposed to be an anomaly.  We fear, MGM’s Q4 commentary will turn that anomaly into a trend. 


The Street looks too high for 4Q 2012 and 2013.  We are currently 13% below the Street in EBITDA for Q4 2012 and 10% below for 2013.  Our below Street numbers are predicated on our cautious macro outlook, way too aggressive Street growth estimates, inflationary cost pressures, and the unfavorable demographic picture we’ve highlighted over the past 6 months.


MGM will report Q3 earnings on October 31st.  We estimate $2.3BN of net revenue and $446MM of consolidated property level EBITDA.  We also look at wholly owned EBITDA plus MGM’s pro-rata share of MGM China and City Center, less corporate expense which produces EBITDA of $395MM.  Our net revenue estimate is in-line with consensus while our comparable EBITDA is 4% below consensus.





We project MGM’s Strip properties to produce net revenue of $1,196MM and EBITDA of $248MM, in-line and 7% below Street numbers, respectively:  average RevPAR declines of 4%, low single digit casino and other growth, and low single digit operating expense increases.

  • Bellagio:  $286MM of net revenue and $76MM of EBITDA, 1% above and in-line with consensus, respectively
    • 1% decline in RevPAR
    • 4% growth in casino & other
    • 4% expense growth
  • MGM Grand:  $239MM of net revenue and $34MM of EBITDA, 4% above and 9% below consensus, respectively
    • 2% decrease in RevPAR
    • 3% growth in casino & other
    • 2% YoY expense growth
    • Last year and last quarter both suffered from low hold, so this quarter has a low bar
  • Mandalay Bay:  $190MM of net revenue and $40MM of EBITDA, 3% and 4% below consensus, respectively
    • 4% decrease in RevPAR
    • 5% decrease in casino & other
    • 5% decrease YoY expenses
  • Mirage:  $144MM of net revenue and $23MM of EBITDA, 1% above and 13% below consensus, respectively
    • 2% YoY decrease RevPAR
    • 4% increase in casino & other
    • 5% increase in expenses
    • This quarter should have an easy comp as 3Q11 casino and other revenue declined 14% YoY due to MGM’s comment that Mirage experienced “very low hold”.  MGM also commented that hold was low in 2Q12.

Other U.S:

  • MGM Detroit net revenue of $139MM and EBITDA of $41MM, in-line and 2% above consensus, respectively
  • Mississippi net revenue of $126MM and EBITDA of $34MM, 3% below and 6% above consensus, respectively

We’re estimating that MGM Macau will report $688MM of net revenue and $172MM of EBITDA (the street is at $668MM and $165MM, respectively.)  Our assumptions in HK$MM’s are as follows:

  • Net casino revenue of $5.3BN and total revenue of $5.3BN
    • Net VIP win of $3.4BN
      • VIP Turnover: 173,300 assuming 9% direct play
      • Hold of 2.93%
      • Rebate rate of 35% or 1.01%
    • Mass table win of $1,430MM
    • Slot win of $503MM
  • Variable expenses of $3,245MM
    • $2,765MM of taxes and gaming premiums
    • $451MM of commissions to junkets
  • Fixed expenses of $715MM
  • $93MM of branding fees

We estimate that City Center will report $48MM of EBITDA on $264MM of net revenues:

  • Aria:  $214MM of net revenue and $40MM of EBITDA
  • Mandarin Oriental:  $11MM of revenue and $0MM of EBITDA
  • Crystals:  $14MM of revenue and $9MM of EBITDA
  • Vdara:  $21MM  of revenue and $5MM of EBITDA
  • $6MM of development and administrative expenses

Other stuff:

  • D&A:  $235MM
  • Corporate & other:  $39MM
  • Stock Comp:  $9MM
  • Net  interest expense:  $276MM
  • Income from unconsolidated affiliates & non-operating items from unconsolidated affiliates of ($24MM)
  • $34MM of tax credits
  • Minority interest of $67MM

Smell The Truth

This note was originally published at 8am on October 10, 2012 for Hedgeye subscribers.

“Keep it simple. Tell the truth. People can smell the truth.”

-Steve Wynn


If you’re looking for Steve Jobs like thought leadership, product innovation, and job creation in this country, look no further than Steve Wynn. The guy gets what most of us who have built something from nothing get – he has vision.


If you and your spouse and/or business partners are really going to build something on your own in this good life, you have to, deep down in your bones, believe that people will side with the truth.


If what you deliver is better than what they currently use, both you and your customers win. If you believe that people are dumb – and that they’re generally not smart enough to Smell The Truth, you’ve already lost. Politics might be a better career path.


Back to the Global Macro Grind


Whatever central planners want to throw at us this morning, I say bring it. The only certainty I have in my life is that the sun will rise in the East and, God willing, I will be sitting right here at my post, preparing to play the game that’s in front of me.


Yesterday, we got long again. We bought Apple (AAPL), Michael Kors (KORS), and Taiwan (EWT). We started the day with 7 LONGS, 8 SHORTS and closed the day with 11 LONGS and 3 SHORTS. Progress embraces change. So that’s what we do.


I’m not saying that our Top 3 Global Macro Themes for Q4 2012 have changed this morning. In fact, I’ll reiterate Theme #1 this morning (#EarningsSlowing) as that remains the market’s most important risk. That risk, however, gets overbought and oversold, fast.


The most important driver of the market’s daily beta isn’t AAPL. It’s the US Dollar. If you get that right, you tend to get a lot of other things right. Here’s the refreshed immediate-term TRADE correlation between the US Dollar Index and stocks:

  1. SP500 = -0.95
  2. EuroStoxx600 = -0.97
  3. MSCI World Index = -0.97

Those are wicked high correlations. So, you can either run around like a chicken with his 50-day Moving Monkey cut off on AAPL… or, you can just build a model that probability-weights where the US Dollar is immediate-term TRADE oversold/overbought, and then buy/sell AAPL (or whatever it is that you really like in the US or Global Stock market) using those signals as your headlights.


At the house of Marcus Goldman (when it was private and Partner Capital was on the line every day), they used to evaluate talent by asking themselves if their players could make money if locked in a “dark room” (by themselves) with only their process.


While they may have not put it that way precisely, I just did. Because I think that’s a great way to think about risk management and what it is, precisely, that you do. When everything goes straight down like it did yesterday, what do you smell? Buy or sell?


As a risk management process, smelling buy/sell opportunities should go both ways. That’s why I have had no problem changing my mind in the last 4 weeks. This isn’t politics – in real life business, flip-flopping your opinion is critical to success.


In the immediate-term, in particular for the beta implied in US stocks, there are always positives and negatives to consider.



  1. USD immediate-term TRADE overbought at $80.16
  2. EUR/USD immediate-term TRADE oversold at $1.28
  3. SP500 Immediate-term TRADE oversold at 1434
  4. VIX immediate-term TRADE overbought at 16.74
  5. UST 10yr yield holding 1.64% support
  6. II Bull/Bear Survey compresses by 1,000 basis points to the bear side


  1. Equity Volume is as dead as a doornail, nowhere to be found on last week’s bounce
  2. Tech (the market leader up until 3 weeks ago) is leading the decline
  3. S&P Sector Studies just saw 4 of 9 Sectors snap immediate-term TRADE support (XLK, XLI, XLY, XLB)
  4. KOSPI (South Korea) broke its immediate-term TRADE line again overnight
  5. Oil (Brent) is back above its TAIL risk line of $112.69/barrel
  6. Bernanke and Geithner are still gainfully employed

But, like any risk manager of any professional game, you have to make a call at some point on which way to lean. That’s why I have built a model that removes most of the emotion that I used to have when making those decisions. An emotional Mucker fights too much.


I don’t want to fight you. I want to help you. I don’t always lean, but when I do, I go with the process that most often tells me the truth.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1761-1792, $112.69-115.01, $79.69-80.16, $1.28-1.30, 1.64-1.76%, $630-642, and 1434-1464, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Smell The Truth - Chart of the Day


Smell The Truth - Virtual Portfolio


The Macau Metro Monitor, October 24, 2012




  • US$2BN facility consisting of a US$550MM equivalent term loan and US$1.45BN equivalent revolving credit facility.  The new facility amend and restate the existing US$950MM credit facilities of MGM Grand Paradise, S.A., in their entirety, and extend the term of those facilities for a five year period to October 29, 2017.
  • Pricing: HIBOR +margin (initially set for 6-month period of 2.5% per year, but thereafter the margin (1.75-2.5%) will be determined by MGM China's leverage ratio)
  • Timing: Expected to close on or about October 29, 2012.


Visitor arrivals totaled 2,161,566 in September 2012, down slightly by 0.2% YoY.  In September 2012, the average length of stay of visitors stood at 1.0 day, up by 0.1 day YoY.  Visitors from Mainland China increased modestly by 0.8% YoY to 1,255,962, with those traveling to Macao under the Individual Visit Scheme rising by 11.4% to 500,395.





Marina Bay Sands has had its busiest MICE month ever, with 13 tradeshows and several key conferences scheduled for the Singapore-based venue.  The 13 tradeshows – approximately four times the monthly average since Sands Expo & Convention Center opened in April 2010 – will attract up to an estimated 46,000 delegates from industries as diverse as architecture, property, travel and hospitality as well as energy, according to venue officials.

The Marina Bay Sands has 120,000 square meters of MICE space across six expo halls and 250 meeting rooms.


MGM China expects to need about 8,000 employees for MGM Cotai.  MGM China CEO Grant Bowie said he is confident the government will come up with policies to help all the Cotai projects in the pipeline to get enough manpower.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


In preparation for RCL's 3Q earnings release on Thursday, we’ve put together the recent pertinent forward looking company commentary.






  • "From 2012 through 2016, our berth capacity growth is less than 3%, and in fact, we don't have any ship deliveries in 2013 at all. But...we also can't stagnate. Given the long lead time for a new vessel, we're approaching the point where a new order could not be delivered until the middle to late 2016, by which time we will be enjoying much better profitability and much improved credit metrics." 
  • "Over the past couple of months, bookings have been running slightly ahead of this time last year from both Europe and North America. We have seen a shift to a closer in booking window in key European source markets, particularly those in Southern Europe. The booking window for North America and most other non-European countries is largely the same as it was at this time last year."
  • "The fourth quarter is yet another story... as of the time of our last call, both load factors and APDs were running ahead of the same time last year. For the last few months bookings have been rather stable, and with only 28% of our inventory in the more volatile European itineraries we are hopeful to return to yield improvement in the fourth quarter."
  • "Royal Caribbean International will decrease in capacity by 4% in 2013. Our growth trajectory will not resume until we take delivery of the first Sunshine ship in late 2014....the company overall will have 10% less capacity in Europe in 2013."
  • [Q1 2013] "Our order book is solid at this point, our load factors are running ahead of a year ago."
  • "For Q4 – we're ahead on both load factor and APD today."
  • [Business booked] "For Q3, we're obviously behind where we would normally be at this time and for Q4, we're doing a little bit better than we would expect."
  • "We've seen more contraction in the booking window in Southern Europe than we have in Northern."
  • [Australia/New Zealand] "I don't regret having more capacity in a market that is getting very robust rates but those rates may be stable instead of going up."
  • "For 2013, I'll give you the percentage of our capacity that is in Europe by quarter. It's 1% in Q1; it's 31% in Q2; it's 49% in Q3; 24% in Q4; and the overall is 27%, which is down from 30% this year. I think we are seeing in Europe a gradual healing I think from the incident in Italy."
  • "Pullmantur...has gone from I think it was 87% Spanish customer-base to now closer to 40% Spanish customer-base as they shift demand to places like South America and Brazil."
  • "The percentage of our customers on our European cruises in 2012 that are coming from North America will be a few percentage points higher than what they were last year or what we had originally expected them to be. It's not a seismic shift but it is slightly higher. Which means that notwithstanding whatever the impediments have been, we have in fact been able to get some additional help from North America with the various challenges that we face in Europe....I don't think that there has been a notable change in that trend."
  • "What we see is that we are in fact able to drive the late business at good volumes. Clearly not at the rates we would like to be commanding for these products, but we are able to drive the business. So that is coming from actually all European source markets."
  • "We've been a little bit more bearish on the Euro so we've not had quite as much exposure there. We tend to have a little natural hedge on our P&L for that so I think we've been less aggressive hedging our new-builds, and as a consequence if we were to hedge those today we'd have a benefit from when we originally entered the contracts, specifically for Sunshine."
  • [Capex growth target] "We're now targeting more low to the top-end mid-single-digit growth within a given year."
  • [Caribbean performance vs that in 2008] "I'd say bigger than we were in 2008... The number of guests that we're attracting on these cruises is higher and the yields are also commensurate with the 2008 levels at this point."
  • "Volumes essentially will need to be higher on a year-over-year basis, the close-in volumes, because we have a larger capacity hole to fill in Europe because of the way that the market developed this year....and at this point, I can say that we are finding that."
  • "Industry overall is making some changes which will probably result in Europe having a slightly less share of the overall cruise industry in 2013 than it had in 2012... I'm talking about something like about 33% this year to maybe somewhere between 31% and 32% next year. So again, it's not a seismic change. But it does reflect the fact that the industry and our company's assets are mobile, and over a two to three year period especially when we do our deployment cycles, we're able to make changes that are reflective of the market opportunities and challenges that we see."


Takeaway: We expect $BWLD to trade well below $70 over the immediate-term TRADE.

Buffalo Wild Wings printed a highly disappointing 3Q12.  This has been a difficult stock to call this year – the market’s reaction to earnings prints have been testament to that.  As things stand post 3Q earnings, we are back where we started: $3.05 in FY12 EPS. 


Below is a slide from our January 19th 2012 conference call outlining our bearish view of BWLD for the year.  We stuck our neck out and made a contrarian call of $3.05 in earnings for 2012.  Needless to say, that was an ill-timed call, but the two pillars of our bear case – input costs and the cost of growth – have been proven out.  We expect earnings revisions from the Street, which remains at $3.21 for FY12.  We remain negative on Buffalo Wild Wings and would expect the stock to break $70.


BWLD’S LONG AND WINDING ROAD TO $3.05 - bwld slide jan call





Management highlighted “high cost of sales and incremental preopening expenses” as moderating factors in earnings per share of $0.57 versus $0.61 in 3Q11 and $0.61 consensus. 


Comparable restaurant sales, for company stores, grew 6.2% year-over-year, which was in line with consensus.  The revenue miss was driven in part by new unit volumes declining year-over-year.  This was especially disappointing for the bulls, given that this has been described – and valued – as a growth concept for restaurant investors.  Operating income declined 8% versus last year.  Consensus was expecting 5.2% operating income growth. 


From here, it seems that margin pressure will continue with decelerating same-restaurant sales.  Weather could be a potential headwind for the stock as we head into the winter months.  Independent of weather, traffic trends remain a concern going forward as the company is – incredibly – taking 6% price in the fourth quarter.  That level of pricing could have unintended consequences for the brand. 


BWLD’S LONG AND WINDING ROAD TO $3.05 - BWLD earnings recap



Howard Penney

Managing Director


Rory Green







Retail Macro Series #1: The Sourcing and Pricing Trade

Takeaway: Here's our first deep dive in a series of Retail Industry Macro topics. First up, sourcing costs vs pricing.

This is the first in a series of Retail Macro reports where we take a deep dive into some of the key sector-specific Macro factors that are driving fundamentals. We’re firm believers that you can’t simply look at POS data or a stream of made-up government data and use it in an investment process. Well, I guess you could, but you’ll probably lose money rather consistently.


Today combine everything from company-reported information, to bills of lading on imports, to specialized government office receipts to BEA/BLS data to tell us the truth about what’s happening with product costing and pricing behavior, how it’s impacting margins, and ultimately how it is represented in the stocks. We’re not going to make a sweeping macro call, but what we will do is isolate the key questions that need to be asked and answered in considering how inflation is impacting the dollars a company pulls out on its gross margin line. Note, there are 8 Exhibits in this report that are critical in understanding our analysis. If, for whatever reason you cannot view them, please reach out to us directly.


The unmistakable math is that we are on the wrong side of incremental change in sourcing/pricing's impact on the supply chain. We're currently at a run-rate of about $6bn per quarter. That might not seem like much in a $280bn industry. But keep in mind that the $280bn is revenue. It has 10% margins -- at best. So we're talking $6bn accretion to a $28bn margin figure. Something tells us that the CEOs in this business are not looking at the math like this, and are not asking themselves if it is sustainable. 


As we are squarely in the period where Average Unit Cost (AUC) is down while Average Unit Retail (AUR) is presumed to be holding up, we want to consider the following analytical build-up…


1)      Get The Cost Component Right. In looking at the cost component, PPI is irrelevant. That encompasses the apparel that is produced in the US, which is less than 5% of what we purchase. We need to look at the actual import cost, which is released by OTEXA (the Office of TEX and Apparel). But to take it a step further, you cannot simply look at PPI vs. CPI. ‘All percents are not created equal’. The simple fact is that the average unit retail is about $11, while the average unit cost is about $3.50. On an apples to apples basis, 1% of the former = about 3% of the latter. In other words, cost can be up 15%, or $0.53 per unit, and all it takes is about a 5% change in Price to generate $0.55 to offset the cost increase.

Exhibit 1) Need to look at dollar value spread between cost and price instead of percent change in both.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro1

Source: BLS, OTEXA and Hedgeye


2)      Aggregate Supply Chain Impact Is Easy To Gage. When we can isolate the units shipped and the cost/price per unit, we can break down the economics of selling pretty easily. Specifically, we can gage the price/cost spread, and quantify how much money is either being inserted in, or detracted from, the apparel supply chain. We like to look at the 3 month trend, which shows prior 2-month shipments vs. current month retail. This appropriately accounts for the lag through which product is clogged up in the supply chain.

Exhibit 2) As is clear in this chart, we’re still clearly in the green as it relates to positive margin impact on retailers, but the trend has decidedly turned negative.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro2

Source: Hedgeye 


3)      The 12-month trend is even more stunning. We’d argue that it is not as relevant as it relates to modeling immediate-term margins for the retail supply chain (i.e. retailers, brands, manufacturers), but as it relates to playing the BIG Macro trend where the group meaningfully outperforms and you make money regardless of what you own – that trade is probably done.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro3

Source: Hedgeye, Factset, BLS, BEA, OTEXA 


4)      The Stocks Recognize This Relationship. To prove the point, let’s look at the relationship between the S&P Retail Index (RTH) and the Spread between Consumer Price and Retail Cost. The relationship is quite strong – though there have been certain points in different cycles when the market discounted the impact of inflation/deflation at different times.  But the discounting mechanism was clearly and definitely there.
Retail Macro Series #1: The Sourcing and Pricing Trade - macro4

Source: Hedgeye, Factset, BLS, BEA, OTEXA 


5)      Reversion To The Mean is Likely, And Is Net Bearish. This one gets a bit more complicated. But in essence, it shows the change in the RTH compared to the change in the price/cost spread. In effect, as the line goes down, it means that either the market is underperforming the inflation spread, meaning that either a) the RTH is underperforming the inflation spread, or b) that the inflation spread is getting positive, but that the market does not care. There have been several notable moves, which are outlined below. But the punchline is that we just came off a 2-stage process whereby 1) both the stocks and inflation spread worked simultaneously, and then 2) the group stopped working, but it did not go down. Inflation spreads caught up partially to the already realized price performance, but to revert to the mean, spreads need to get meaningfully better, or the stocks need to head lower.
Retail Macro Series #1: The Sourcing and Pricing Trade - Macro5

Source: Hedgeye, Factset, BLS, BEA, OTEXA 


6)      Triangulating The Data…With More Data. Let’s slice and dice the data another way by triangulating it with container imports. Theoretically, if we know a) the average price per container at cost for every box coming into US ports, which we do (about $57,000 per container), and b) the average cost per garment coming into the US, then we know one of two things… 1) The change in mix, or 2) the load factor (the amount of stuff crammed into the box). Almost always, the difference is the load factor (which currently sits at about 16,300 garments per box). For the record, that ratio fluctuates greatly by category – women, men, footwear, athletic, baby, underwear etc…, and we have all that data and will have a future Macro Deep dive on it.   

What it shows us is that as unit costs rose due to the commodity bubble, shipment value actually came DOWN. We know that mix between subcategories did not erode during that time period, not did average price inter-category. What that tells us is that the Load Factor came down significantly. Remember that if you own a factory in Asia and you ship a container every Monday and Thursday, you don’t cancel the box simply because there’s less stuff to go into it. You ship it, but with less product in the hold.
Retail Macro Series #1: The Sourcing and Pricing Trade - Macro6

Source: Hedgeye, PIERS, OTEXA, BEA, Company Documents, Factset


7)      Strength Could Take Margins Higher. When we look at this Load Factor versus aggregated margins for every company in the industry, the relationship is simply unmistakable. The only problem for margins is that the Load Factor change is at peak. We agree that it could head higher from where it is today…
Retail Macro Series #1: The Sourcing and Pricing Trade - Macro7

Source: Hedgeye, PIERS, OTEXA, BEA, Company Documents, Factset


8)      But It HAS To Print Those Numbers To Satisfy The Bulls From Here. The market recognizes this relationship just as well as we do. Unfortunately, it suggests that the Load Factor change will remain about where it is today, or better,  and in no way discounts that we could see a slowdown in unit shipped.
Retail Macro Series #1: The Sourcing and Pricing Trade - MACRO8

Source: Hedgeye, PIERS, OTEXA, BEA, Company Documents, Factset

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.