The Macau Metro Monitor, October 26, 2012




Starting sometime next year, operating hours at the border checkpoint between Cotai’s Lotus Bridge and Hengqin Island will be extended for both passenger and goods vehicles.  Passenger vehicles can currently cross at the Hengqin checkpoint between 9am and 8pm.  Cargo trucks have access from 8am to 8pm.  Simplified customs procedures are also being planned.



Macau's unemployment rate remained stable at 2%, compared with the June-August period.  Total labour force increased by 5,500 QoQ to 351,000, with an increase of 5,700 in total employment and a decrease of 200 in the unemployed.  Analysed by industry, 26.4% of the employed were working in Recreational, Cultural, Gaming & Other Services, and 15.8% in Hotels, Restaurants & Similar Activities.


Major Changes

“An economic model conditioned on the notion that nothing major will change is a useless one.”

-Nate Silver


I’ll reiterate Hedgeye Risk Management’s top Global Macro Theme for Q4 of 2012 this morning: #EarningsSlowing. We are finally seeing Major Changes to buy-side expectations for revenue and earnings. The sell-side’s estimates remain in lah-lah land.


As Nate Silver writes on page 193 of The Signal And The Noise, “anticipating these turning points is not easy.” But I fundamentally believe that if you study history, do math, and believe in the probability of mean reversion occurring, it’s certainly less hard.


“So we should have some sympathy for economic forecasters. It’s hard enough to know where the economy is going. But it’s much, much harder if you don’t know where it is to begin with.” (Silver, page 194). Since March, Global #GrowthSlowing has caught most consensus economists off-sides in 2012. Now #EarningsSlowing (which happens on a lag versus revenues) has analysts off-sides too.


Back to the Global Macro Grind


Flying back from California yesterday, I was watching Amazon (AMZN) and Apple (AAPL) earnings roll across my tweet-tape, and I couldn’t help but think, ‘gee, wouldn’t it have been nice if all the bulls warned us that both companies would miss and guide down?’


The risk that needed to be managed in AMZN and AAPL isn’t what you’ll see when the stocks open today - we’re already 5 weeks into what’s turning into a very serious draw-down in Tech (XLK) overall.


From the Bernanke Top (September 2012):

  1. Technology (XLK) = down -10%
  2. Apple (AAPL) = down -14%
  3. Amazon (AMZN) = down -15%

Remember, AAPL represents 20.6% of the Tech Sector (XLK) ETF. So Tech is outperforming AAPL at this point (and the SP500 is outperforming Tech). That means that anyone who was outperforming being long AAPL until September is probably now underperforming. Typically when this kind of rotation starts to happen in your portfolio, beta starts to eat your alpha.


Overall, beta (the SP500) is outperforming both Tech, AMZN, and AAPL. Since the Bernanke Top, the SP500 is in what we call a correction (down -4.2%). A draw-down is different than a correction. When you have double digit losses in a position, the next question isn’t “what is the stock down on the open?; it’s will this position start to crash?”


We define “crash” as a peak-to-trough price decline of 20% or more. Russia is teetering on moving back into crash mode this morning (RTSI down -1.8% on the session; down -18.3% from the March global #GrowthSlowing top). We’ll give the ole Bernank some credit for that one too – Russian stocks have everything to do with Petro-Dollars – and now we have Strong Dollar, Down Oil.


Away from the market’s leaders missing, that’s the other Big Beta thing going on out there this morning – remember, get the Dollar right, and you get a lot of other things right. Looking at Global Equity risk, the current 60-day Correlation Risk between the USD Index and the broad indices are as follows:

  1. SP500 = -0.87
  2. EuroStoxx600 = -0.95
  3. MSCI World Index = -0.91

So, you can look at risk from a bottom’s up stock perspective and/or from a top down (SECTOR, COUNTRY, or ASSET CLASS) beta risk factoring perspective, and you’ll learn a lot more about what’s really going on out there.


Keynesian economists have been saying that the Fed’s Policy To Inflate has not been causal to Correlation Risk. I say that’s a crock. If Romney wins the election (on that risk factor, probabilities in your conditional Bayesian model should be rising, not falling), there is a very good chance that the most asymmetric risk in all of Global Macro (Strong Dollar) busts a big move to the upside.


If that happens, the aforementioned correlations are probably going to keep moving towards 1.0, and we’ll probably be really right, in the immediate-term on Hedgeye’s 2nd Global Macro Theme for Q4 of 2012: Bubble#3 (Commodities).


I re-shorted the Gold Miners ETF (GDX) with that causal relationship in mind yesterday. I also re-shorted the Industrials Sector ETF (XLI) on green yesterday too.


Jay Van Sciver’s bearish thesis was very cogent in yesterday’s Early Look. If you believe there’s a bubble in Mining Capex, you’re probably in agreement with us that the revenue and #EarningsSlowing risk to pro-cyclical Industrials like Caterpillar (CAT) and Komatsu (KMTUY) remains to the downside as well.


Major Changes aren’t always underway in markets, but when you can get in front of the big ones you can save yourself, family, and clients from losing a lot of money.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, AMZN, AAPL, XLK, and the SP500 are now $1, $105.98-110.66, $79.64-80.25, $1.28-1.30, $217-228, $591-613, $28.44-29.14, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Major Changes - Chart of the Day


Major Changes - Virtual Portfolio


Takeaway: We have been bearish on casual dining. So far, earnings season is suggesting that the industry fundamentals may be worse than we thought

We are republishing a note from three weeks ago that outlined our bearish view on casual dining.  Incremental data emerging today is suggesting that casual dining comparable sales growth may be decelerating further in October from September’s trends.  With Brinker highlighting adverse macro conditions and BJ’s Restaurants echoing those sentiments today after the close, we believe that it is worth reiterating our negative stance on the category.   Our favorite ways to play this theme is short BLMN, TXRH, DRI, and BWLD. 



Casual Dining Caution


We continue to believe that consensus is far too bullish on casual dining top-line trends.  Anemic real wage growth is just one of many macroeconomic headwinds that we believe merit caution going forward.  The Restaurant Value Spread, as we wrote about here, is suggesting that inflation at restaurants outstripping inflation at grocery stores may be having an adverse impact on same-restaurant sales growth this year.  


The casual dining sales index, shown below, is a simple average of a broad selection of casual dining companies’ same-restaurant sales data.  The Knapp Track Index, which we are not permitted to illustrate directly in chart form, leads the index depicted below (correlation=0.96). 







Internally, and within regular posts, we have been discussing the spread between the year-over-year growth rates of the Bureau of Labor Statistics’ CPI for Food at Home and CPI for Food Away from Home metrics for some time.  Initially, our analysis focused on the spread as being relevant for companies’ pricing strategies but we also believe that the spread, which we call the Restaurant Value Spread, is a driver of traffic for the restaurant industry.   The Restaurant Value Spread goes some way to explaining the resilience in restaurant industry sales trends in 2011.  The spread effectively represents the relative rate of inflation between grocers and restaurants.  In 2011, rampant food inflation was passed on to consumers by supermarket chains but not, to the same extent, by restaurants.  We believe this buoyed traffic trends within the restaurant industry, particularly casual dining.  Empirical data suggests that the spread turning negative may not bode well for casual dining trends from here.  Additionally, the Street is expecting a positive turn in casual dining trends that we believe is looking less and less likely. 


Below is a chart of a Casual Dining Same-Restaurant Sales Index, comprised of a simple average of the comps of twenty-one casual dining concepts, versus the Restaurant Value Spread.  The dotted line represents what consensus expectations imply for the Index over the next four quarters.  We believe that many factors are working against casual dining from here: over-supply, food inflation, energy inflation, negative traffic, employment trends, and anemic real earnings growth are several of the key headwinds we are concerned about.  Relative value is another metric that we are watching closely.  The chart below implies that, if relative value impacts “share of stomach” within the food industry, casual dining same-restaurant sales growth expectations from here could be overly bullish.





The Restaurant Value Spread also tracks quite closely with the Knapp Track Casual Dining Same-Restaurant Traffic Index over time.  Additionally, the same-restaurant sales trends of several companies within casual dining track closely with the Restaurant Value Spread.  Below, we discuss two stocks that we think are topical at the moment, within casual dining, and offer commentary on our current thoughts and what meaning, if any, we take away from charts of their respective sales trends versus the Restaurant Value Spread.


Brinker has been one of our favorite names in the restaurant space over the past 2.5 years.  The stock has provided some handsome returns to shareholders over that period as investor sentiment, while investor sentiment has been dramatically improved.  That sell-side bearishness peaked in April ’12, well into the stock’s rally, tells us how entrenched the negative view of Brinker was on Wall Street.  That said, there are still several factors that we believe are working in the company’s favor.  We like EAT on the long side versus its peers, especially TXRH, DRI, DIN, and BWLD.  Some additional factors worth bearing in mind:

  • The Restaurant Value Spread chart (below) indicated that same-restaurant sales expectations may be overly bullish for Chili’s.  The correlation, historically, is not consistent and we believe Chili’s is taking share via its new sales layers (pizza) and strong-performing remodels (~5% comps).  That said, it is likely that an erosion of the value proposition Chili's represents versus supermarkets and/or its peers will impact its same-restaurant sales numbers.
  • Chili’s has invested in its kitchen technology and, in our view, should reap significant rewards relative to the competition over the coming quarters and, possibly, years.  Applebee’s has been turning to non-scalable sales initiatives like 24 hour opening and “Club Applebee’s”; we are confident that Chili’s investing in technology and service initiatives has generated, and will continue to generate, strong sales versus the industry. 




Texas Roadhouse is a stock that we are negative on given its position within a highly-competitive segment at a time when we expect tough top-line compares to impact the stock in the coming quarters.  Additionally, aggressive discounting by a newly-public competitor is likely pressuring same-restaurant sales.  We believe that earnings revisions are unlikely to rise from here, as we wrote in our 9/19 note, “TXRH: WHERE TO FROM HERE?”  Sales growth lagging capex growth and beef inflation pressuring margins should, in our view, depress returns going forward.  As CFO Price Cooper said on the 2Q call, “While our newer restaurants continue to open strong, as they move through the honeymoon period and their sales normalize, their base is slightly less than existing restaurants.”  We believe that there is risk to the stock’s multiple if returns decline.

  • We view Texas Roadhouse as being one concept that the Restaurant Value Spread is especially relevant for.  To the extent that the Restaurant Value Spread being north of 300 bps wide last year may have driven consumers from Kroger to Texas Roadhouse for steak dinners, we expect the collapse in that spread to negative territory to have an adverse impact this year. 




Darden is a stock that we have been negative on for some time.  Please email us for a copy of our recent Blackbook detailing our thesis.   The company’s recent $0.02 beat was supported by an unusually low tax rate ($0.02-0.03) as well as expanded marketing and promotional initiatives. Operating profit missed consensus expectations.  Given the low quality nature of the 1QFY13 beat, our continued conviction in our thesis, and consensus continuing to show unwarranted faith in Olive Garden sales rebounding, we retain a negative view of Darden’s stock at these levels. 

  • Casual Dining same-restaurant sales trends were strong in 2011, benefitting in part from the relative value that the category represented for consumers versus the grocery aisle where inflation was running at 6% year-over-year.  That Olive Garden was left behind by this upward surge in casual dining trends is telling.  We are not in agreement with consensus that Olive Garden comps will turn sharply higher from here.  As the second chart (below) indicates, traffic trends have not been moving in a positive direction. 


HOW BEARISH IS BEARISH ENOUGH? - olive garden vs restaurant value spread


HOW BEARISH IS BEARISH ENOUGH? - Olive Garden Traffic vs Restaurant Value Spread


Howard Penney

Managing Director


Rory Green





FNP: Juicing Kate

Takeaway: Incrementally juicing Kate Spade’s hyper-growth status is good for FNP. We see significant upside over the intermediate-term.


FNP’s preannouncement earlier this month leaves little to report on the quarter, but today’s call included a few juicy takeaways for investors. The bottom-line, we think there’s still a very positive asymmetric setup for this stock. This was a ‘back up the truck’ call on the pullback and we still have it as a top long even after today’s 11% move. Here are the key takeaways from today’s call:

  1. Sq. ft. growth is going materially higher. We expected discussion of sq. ft. growth opportunities to surface last quarter. As it turns out we were a quarter early, but it was worth the wait.  
    • Last quarter management spoke to 40-45 new stores between 2H and 2013. Kate opened 9 in Q3, expect 6 in Q4 and now 40+ domestic stores alone in 2013. That’s before adding another 25 stores internationally (mostly Japan). With this type of store growth, mid-to-high teens comps next year and the Japan business adding an incremental $100mm+, investors will start circling Kate revenues approaching ~$800mm next year. For a brand that represents ~75% of FNP’s equity value and we expect to book ~$465mm in revenues this year – that’s a material increase.
    • Lucky is also going to see accelerated growth with 12-15 stores planned compared to our expectation of 10. Solid. But this pales in comparison to the acceleration at Kate and impact on the stock.
  2. A Kate Spade investor day coming in 1H 2013. We’ve seen it from other companies with multiple brands (e.g. VFC), but an analyst day outlining all of the moving parts of the brand and opportunities ahead makes a ton of sense. The reality is that as much as this stock is transforming, so too is the company’s most important asset. Detailing the visibility and economics behind the aforementioned ramp in revenue growth is absolutely a net positive given the discounted multiple the market assigns to this brand. The timing here is unknown, but sounded like a 1H event.
  3. The least desirable outcome for Juicy just got halved. Of the three potential outcomes for Juicy (#1: business improves – FNP keeps it, #2: business erodes – FNP sells it, or #3: business sputters along – FNP keeps it) we think the odds of the least favorable (#3) have just been reduced from ~20-25% to maybe half that. October-to-date comps are up +MSD and initial markdown activity has been met with healthy sell-throughs. This turn will require more than a month’s worth of results to sort out, but we still think the odds are in favor of a monetization
    event by next summer here.

All in, incrementally juicing Kate Spade’s hyper-growth status is good for FNP. To put it in perspective, Kate’s adjusted EBITDA margin is nearly 20% today. In looking at a $800mm revenue base assuming similar (should be higher) margins we’re talking $160mm in adjusted EBITDA for Kate alone. Corporate overhead is expected to come in around $60mm next year. Assuming Lucky, Juicy, and Adelington all come in at the low end of their respective brand profitability ranges provided by the company earlier this month and zero growth, or change in profitability, that suggests another $80mm in adjusted EBITDA. That’s $180mm in adjusted EBITDA in FY13. We think the real number will be closer to $200mm.


Now is that where we expect the company’s initial 2013 outlook to shake out? No. We expect more conservative guidance given the company’s track record. But more importantly the commitment to growing Kate suggests this will be a $1Bn+ brand by FY14. That suggests well over $1.00 in earnings power and EBITDA approaching $300mm by FY14. That’s clearly not reflected in the stock here at $11. With greater clarity regarding the fate of Juicy and visibility of Kate Spade’s growth trajectory coming in 1H, we see significant upside over the intermediate-term.


Takeaway: The momentum continues for BYI's with a beat and raise despite the challenging competitive and macro environment

BYI beats the quarter on the back of better gaming equipment sales and margins and strides in their gaming operations business. FY13 guidance was also raised



“Our first quarter fiscal 2013 results continue to reflect the success of our expanded game studios, our new technology platform, and our successful execution on a number of other initiatives, including the entrance into new markets. We expect continued growth from each of our businesses as both our visibility and our customer partnerships are at remarkable levels, and we continue to identify new growth opportunities."


- Richard M. Haddrill, the Company’s Chief Executive Officer




  • WAP revenues increased 92% YoY and 37% QoQ
  • Launched NASCAR successful across the casino floor across iVIEW and iVIEW DM
  • Expect continued improvement in gaming equipment margins 
  • Game sales:  3,865 units to NA, 3,078 replacement units.  Replacement uptick reflect a pick up in the replacement market and BYI's higher ship share.
    • After factoring out the lower priced VLT and VGT units in the Q, ASPs would have been up 1% QoQ
  • Expect game equipment margins will approach 48-49% by the end of FY13
  • Linked progressive systems count excludes Ontario linked games - those are in daily fee and rental
  • Effective income tax rate was 37.3%.  Expect effective income tax rate will be between 37-38.5%.
  • Feedback post G2E has been very encouraging
  • BYI mobile continues its strong momentum - they now have 6MM users.  Seeing significant growth in new customer acquisitions (+50% YoY) and in the delivery of new applications.
  • Expect their 12 major operators including the recently announced GameAccount Network to feature the bally virtual game library on their portals during the FY2H12 generating incremental revenues
  • MJ and Grease remained their best performing WAP titles
  • Pipeline of new WAP titles remains very strong:  Beach Boys, NASCAR, Tiki Magic, Pawn Shop, etc
  • Shipped 175 VGT units to IL this quarter.  Expect their rollout of 4,000 units to take 2 years.  Expect most units to be for sale rather than lease.
  • International game sales were below their expectations
  • Added 6,000 slot machine connections to their systems business this quarter.  Implementations in Canada and Africa are progressing well. They are very bullish on systems for many quarters to come.  Using NASCAR with their ELITE BONUSING SUITE is a big catalyst for their systems software business.
  • Recurring revenues accounted for 53% of the last 4 quarters' revenues
  • They do not view their recent success as a good run but as sustainable. 



  • International guidance:
    • There are several markets required additional regulatory improvements
    • Issues with Argentina's trade balance
    • Feel like they have some great product roll-outs over the next 6-9 months
    • Part of it is that they focused on NA development recently, perhaps to the detriment of international sales
    • Expect strong systems growth over the next year or so
  • Pricing pressure on participation and sales
    • Their pricing is strong and remains consistent
    • They are not capping their WAP products
    • Feel like with their iDECK and product, they are providing good value to their customers
  • Update on Italy:  Continues to be a challenge.  Have 300 games out there producing mixed results. Still feel optimistic in hitting their 1,000 unit target by year end. But it takes time to tweak the games.
  • What drove upward guidance: 1) very positive feedback on G2E, 2) Growth in game studios, 3) Faster improvement in product margins 4) better visibility in systems 5) more confident on VLTs
  • For now they are shying away from paying a dividend. Would rather keep dry powder for buybacks and accretive acquisitions.
  • The units moved into systems were more like low single digit yields.  Therefore, what's left in gaming operations is more comparable to Class 3.  The 8,000 units - $1.5MM/Q - mostly are from system maintenance on SDS and the balance is from selling additional products to SDS.
  • Would be comfortable leveraging up to 3x given their stable revenue base
  • Growth opportunity:
    • Video lottery is a relatively new market
    • 2014 openings actually look pretty good:  Ohio tracks (8K); IL VLTs, CA tribal (2.5k)
    • WAP is an emerging area for them
  • NASCAR is the first time a brand has been used in the systems arena
  • Watching their bad debt expense which is up a bit this quarter.  Feel like they are being sensible in providing customer financing but not aggressive and pulling business forward like some competitors.
  • Gaming reform in Mexico:  Market is slowly starting to improve after things froze up post violence
  • The multi-connect base for their VLTs is not complicated.  They may be light on the front end depending on the pace of licensing. The multi-connect will start going live over the next weeks. The two are not really related (game sales and multi-connect that is).
  • There was some unusual jackpot expense this quarter - still believe in the 68-73% range for gaming operations. 
  • September is a seasonally slow Q for systems installations
  • Remaining Atlantic Lottery unit shipments:  expect them to be more front end loaded than previously
  • Think that in the Nov-Feb timeframe both of those projects will go live (S. Africa & BCLC) and continue for several years after that
  • Pawn Stars is not WAP. Super HOT SHOT is the first WAP follow up game



  • Raised FY12 guidance to $3.05 to $3.35
  • BYI reported $0.77 cents, coming 10% ahead of consensus estimates
  • Board approved new $150MM buyback program. BYI repurchased $67MM worth of stock since 2Q
  • BYI's "leverage ratio remains comfortably below 2.0 times, which leaves the Company’s share repurchases unrestricted under the terms of its credit agreement. This quarter represented the 20th consecutive quarter the Company has repurchased its common stock."
  • Gaming equipment highlights:
    • BYI's shipped 670 Video Lottery Terminals ("VLT") to the Atlantic Lottery Corporation and initial Video Gaming Terminals ("VGT") units to IL. 
    • ASP: $16,863
    • International shipments were 16% of total
    • "Gross margin increased YoY... primarily due to mix and cost reductions on certain models of the Pro Series line of cabinets"
  • Gaming operations highlights:
    • WAP CASH CONNECTION install base increased to 1,216, up 94% YoY
    • "Gross margin decreased YoY primarily due to higher jackpot expense."
  • Systems highlights:
    • $21MM of maintenance revenue
    • "Gross margin increased... primarily as a result of the change in mix of products. Specifically, hardware sales were 26% of systems revenues, and software and service sales were 34%, as compared to 28% for hardware and 33% for software and services in" 3Q11.
  • Bally and IGT "announced today they have entered into a Settlement and License Agreement that will end their pending patent litigation in the case styled IGT v. Bally Gaming Int’l, Inc., Civil Action No. 1:06-cv-00282-SLR (D. Del.). As part of the settlement agreement, BYI will obtain a patent license to IGT’s bonusing portfolio under confidential terms and will dismiss its counterclaims with prejudice."

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