The Macau Metro Monitor, November 1, 2012




Macau GGR rose 3.2% YoY to 27.7 billion MOP (26.9 billion HKD, 3.47 billion USD).


Moving Fast

“The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.”

-Rupert Murdoch


A friend of mine in Connecticut just sent me that quote. Like most of us on the East Coast, he’s up and at it early this morning. Risk happened fast. Now it’s time to slap on a pair of jeans, fire up our generators, and take on the day.


In The Signal And The Noise, Nate Silver calls out what physicist Didier Sornette alludes to as the “fight between order and disorder” (page 368). That fight isn’t new. However, through chaos theory, we are beginning to understand it more clearly.


Not unlike the world and its weather, I think about the Global Macro marketplace as one of interconnected factors that are colliding within a complex system. “Complex systems like this can at once seem very predictable and very unpredictable… they periodically undergo violent and highly non-linear phase changes from orderly to chaotic and back again.” (Silver, page 369)


Back to the Global Macro Grind


For most things Big Beta, October was gnarly. We won’t know what the fallout looks like on the buy-side until it’s old news. But the new news is that buying high-beta stocks and/or commodities at the Bernanke Top of September 14th, 2012 left a mark.


That’s not to say there weren’t what perma-bull marketing pundits tried to sell you yesterday morning as a “hurricane Sandy buying opportunity.” You just need to be selective about what you buy and when.


In the US stock market alone, look at the S&P Sector performance divergences for October 2012:

  1. SP500 = -2.0%
  2. Financials (XLF) = +2.0%
  3. Utilities (XLU) = +1.4%
  4. Basic Materials (XLB) = -2.1%
  5. Technology (XLK) = -6.3%

Markets rarely make perfect sense to me but, from a research perspective, these Sector divergences did.

  1. SP500 = bearish TRADE and TREND, so pervasive weakness into month-end made sense
  2. Financials = that’s the 1st Sector you buy if you think Romney wins (his closing the gap was enough, for starters)
  3. Utilities = that’s the low-beta trade that we recommended downshifting to last month; we’re still long it
  4. Basic Materials = get the Dollar right (Romney momentum = anti Bernanke momentum), you get commodities right
  5. Technology = Growth and #EarningsSlowing (our Top Macro Theme for Q412) matters, in the end

Where to from here? Let’s start with the Hedgeye Asset Allocation Model:

  1. Cash = 58%
  2. Fixed Income = 21% (Treasuries, Treasury Curve Flatteners, German Bunds – we still like them all during #GrowthSlowing)
  3. International FX = 15% (Strong US Dollar, stick with it unless it becomes clear that Obama is going to win)
  4. US Equities = 6% (Utilities and Financials we think continue to work; buy them on red)
  5. International Equities = 0% (with markets like Russia moving back into crash mode (-19.1% since March) we’re in no hurry)
  6. Commodities = 0% (we’ve been calling it Bernanke’s Bubble since March – sticking with it)

The asset allocation model isn’t for everyone. It’s actually for me. It’s how I think about my own money and what I am willing to put at risk at a given time and price. Since I own a lot of Hedgeye stock, my Cash position is overstated. This is meant to be a product whereby I can signal when/where I’d be adding to or subtracting from big liquid asset classes, on the margin.


The most important principle in my decision making process is uncertainty. I embrace it every minute of the day and reserve the right to change my mind, fast. That’s not for everyone. And I get that. I also get that, sometimes, it’s better than being slow.


After all, that’s what Rupert Murdoch is alluding to in the aforementioned quote inasmuch as the world’s largest sovereign governments have been reminding you of, almost daily, for the last 5 years. While Too Big To Move can be a problem for you when you have an 80 foot tree hanging on power lines across your driveway, you still need to be fast to adapt and change.


Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Technology (XLK), AAPL, and the SP500 are now $1, $107.41-109.09, $79.56-80.39, $1.28-1.30, 1.70-1.75%, $28.29-29.44, $586-616, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moving Fast - Chart of the Day


Moving Fast - Virtual Portfolio

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Takeaway: Consensus BKW US & Canada same-restaurant sales estimates are very aggressive and Burger King's system remains "Too Big To Fix".

Burger King’s 3Q12 earnings per share beat consensus estimates by $0.02 but the myriad adjustments and one-time items muddied the waters.  The company has been cutting its way to improved profitability but history tells us that this, as a sole driver, is unsustainable.


The performance in sales trends is what carries most weight for the Burger King investment thesis.  On that metric, the outlook is uncertain.  In the U.S., two-year average trends accelerated by 100 basis points, sequentially, from 2Q12 to 3Q12.  The U.S. constitutes almost 60% of the store-base.  As the charts below highlight, consensus is expecting a sharp acceleration in trends during the first half of 2013.  Holding current two-year trends level suggests negative same-restaurant sales trends for 1H13. 




BKW: NOT A QUARTER ROYALE - bkw us canada consensus


Same-store sales slowed on a two-year average basis in Latin America and the Caribbean and Asia Pacific (18% of the store base); flat in Europe, the Middle East and Africa. 



Outlook for Burger King


The overall BK strategy, according to management, is based on 4 pillars: Image, Menu, Marketing Communications, and Operations.  Below, we outline some thoughts on these initiatives and the progress that was made on each during the third quarter.





Remodeling the store base is the core focus of the “Image” initiative.  There was some good news in the quarter.  The number of Burger King stores in the USA needing to be remodeled is shrinking, but it needs to continue shrinking.  At the end of 3Q12, the system wide units had declined by 1% year-over-year and 0.2% sequentially.  Also, management announced that they received new commitments to re-image more than 350 restaurants in the United States and are on track to reach our target of having 40% of the US and Canada system on a modern image within three years.


The bad news, from our perspective, is that they did not disclose how many units were remodeled during the quarter.  The company outlined plans suggesting that almost 3,000 restaurants will be converted over the next three years.  The implication is that the Burger King system, in the United States and Canada, needs $350 million in capital every year for the next three years in order to complete the re-image program.


During the earnings call, management stated that its “analysis of remodels completed to date continues to reflect an average sales uplift of 10% to 15%, providing an attractive return to franchisees.”   Whether or not that target is achieved, even post-reimage Burger King store volume would be significantly below the competition.  


Hedgeye Conclusion:  We still believe that Burger King is “too big to fix”.



The Menu


Management stated that it is “seeing tangible results from the strategy to balance targeted promotions in premium limited time offerings.  This strategy is designed to shift our consumer profile and product mix, which we believe is key to driving positive, profitable growth for the BK system in the long-term … A key element of our strategy is to broaden the appeal of our advertising and bring a more diverse customer mix back into our restaurants. We saw further evidence of results on this front in our consumer segmentation data, which shows us that the change in marketing strategy has been successful and Burger King's mix of both women and customers age 50 or older increased.”


Hedgeye Conclusion:   Changing the menu at this point, and focusing significant amounts of resources and energy on it, is putting the cart before the horse.  It may require some attention to a degree, but is not going to lead Burger King to where shareholders want it to be.  Emil Brolick, at a lunch hosted by WEN at the outset of his tenure as CEO, stressed the importance of improving his company’s asset base over menu items for sustained market share gains.  We do not know any other QSR companies targeting customers 50 years of age and older and we think there is a reason why others are not focused on that demographic.



Marketing Communications


Management stated: “Our television advertising is increasingly focused on taste, which we think is a key differentiator for Burger King due to our flame-broiled grilling platform. This quarter, we used our advertising focused on limited time chicken offerings to create awareness around our broader chicken platform, including the Chicken Parmesan Sandwich, our new Popcorn Chicken, as well as wraps.”


Hedgeye Conclusion:  Burger King stepped up media spending in 2Q and 3Q to unsustainable levels.  We will see if the investment yields positive returns over the next few quarters but the current level of media spending will not continue. 





Management stated: “Speed of service slowed marginally with the introduction of our new products in early Q2 but has improved in the subsequent months, as coaches and crews in the restaurants accumulated experience with the new platforms and product builds. Our average speed of service is likely to remain somewhat higher than some of our peers due to our made-to-order service model, but we still have more work to do to reduce wait times and improve training in connection with the new product roll-outs.”


Hedgeye Conclusion:  Burger King’s service standards were significantly below the competitors before the introduction of new menu items.  Now, it seems, relative performance on those metrics is getting worse.  Adding complexity to the menu will likely impair any progress on this front.



Howard Penney

Managing Director


Rory Green



PVH/WRC: Finally

Takeaway: While the strategic and financial implications make a ton of sense – we see further upside from here.

 After nearly a decade of speculation, the timing finally aligned for PVH to capitalize on WRC’s operating shortfalls through 1H. With a business over-indexed to Europe and WRC in search of a transformative deal, Manny Chirico (CEO) moved in earlier this summer sealing a deal just 8-months into Helen McCluskey’s tenure. The reality is that a combined PVH/WRC makes sense and initial accretion projections are likely conservative. This is a win/win for both as the 22% increase in aggregate market cap today suggests, but we see further upside with $10 in FY14 EPS on the horizon.

  • Based on our estimates, Calvin Klein accounted for ~70% of WRC’s revenue base and ~80% of total EBIT. With the transaction valuing WRC at ~$2.9Bn and assuming a 5x EBITDA multiple for WRC’s Heritage businesses(Chaps, Speedo, and intimate brands Olga and Warner’s), the deal implies PVH paid a ~9.5x multiple for the CK business on FY12E estimates and under 8.5x FY13E pre synergies. This isn’t exactly a steal, but if you believe that WRC’s numbers are depressed, then it is attractive enough for a brand that has grown at a +13% CAGR at retail since it was acquired by PVH in 2003 and is expected to grow +8%-10% over the next 5-years.
  • At risk of stating the obvious for a deal so widely expected, the strategic fit here makes sense given that WRC is PVH’s biggest licensee. Layer WRC’s core business over PVH’s infrastructure while complimenting each company’s regional strengths – PVH in NA and Europe, WRC in Latin America and Asia. Not to be overlooked is the ability for PVH to control the presentation of CK in its entirety at retail, which should help reignite a struggling ~$700mm CK Jeans franchise.
  • With $100mm in costs targeted for elimination over the next 3-years as well as MSD-HSD revenue growth, PVH is looking to grow operating margins by nearly 50-75bps over each of the next 3-years.
  • With $1.00 in EPS accretion by 2015 likely conservative, investors will start looking at FY14 EPS approaching $10.00. With margin expansion under the combined entity expected to drive a high-teens earnings growth rate over the next 3-years, we think multiple expansion is likely. However, even if we simply take the upper end of PVH’s historical EPS multiple over the last decade of 16x, we’re looking at a $160 stock over the next 12-24 months suggesting a 20%+ annual return even after today’s 18% move.
  • Targeting early 2013 for closing the transaction.

Additional Highlights from the Call:

  • WRC operating teams expected to stay on to operate various brands with headcount reductions expected to be primarily in back office
  • PVH expects to pay debt down by $400mm/yr over the next 4yrs – focused on delivering as they did post Tommy deal
  • Looking to finance the deal with a $4.324Bn financing commitment in the form of both bank financing and unsecured notes
  • PVH will have more favorable leverage ratio post WRC deal (3.4x) than 2yrs ago when it bought Tommy (3.6x) – goal to get back down below 2.5x
  • With this deal PVH hurdles RL in retail second only to VFC in revenues
  • Deal shifts ~$100mm in WRC royalty revs to owned leaving a ~$170mm royalty base going forward
  • Plan to leverage Tommy’s European expertise to drive stronger CK apparel presence in Europe beyond today’s $1Bn in revs
  • Tommy growth opportunities via WRC’s Asia/Latin America presence upside to today’s plan – but don’t want to risk significant growth opportunity for CK by integrating Tommy too early (3-5yrs out)
  • Operate a $200mm Tommy business in Latin America today and $600mm Tommy business in through licensing
    partners that present an opportunity to integrate in the future
  • PVH assuming Chaps license (RL) does note continue re its accretion assumptions – currently in discussions with RL about this now
  • ‘no intention of selling it at this point’ – re strength of Speedo business.
    • Though ~$400mm+ PVH could get for Heritage business could help toward delivering if need be
  • WRC’s store growth plans under review. Underwear stores work, but would like to put underwear and jeans under same roof


PVH/WRC: Finally - PVH WRC 2


PVH/WRC: Finally - PVH WRC 3


PVH/WRC: Finally - PVH WRC 1


PVH/WRC: Finally - PVH WRC 4



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




  • Same:  EBITDA fell short of expectations but could've been worse.  Management commentary was very similar to that following Q2  


  • MIXED:  Net revenues declined 4.1% YoY in 3Q due to lower casino revenues, largely resulting from a decline in trips.  Property EBITDA grew 12% YoY due to decreased property operating expenses resulting from cost savings initiatives and lower property tax assessments.
    • "The Atlantic City region, as you're well aware, has been challenged for a number of years and continues to be challenged. However, the growth decline in that region has started to mitigate and, as we move forward with the annualization of Aqueduct and the annualization of Revel, we would expect that to continue to improve."
    • "Our margins at Atlantic City are under tremendous pressure as revenues continue to decline. Many of the properties there operate unprofitably for reasons that are very hard to understand. And so, we continue to look at all manners of adjustment we can make to try to keep our operating expenses as low as possible."


  • MIXED:  While net revenues were slightly higher, property EBITDA fell 5% YoY because of the increase in property operating expenses.  Also, CZR estimates that the negative impact caused by Project Linq construction activities reduced EBITDA by ~$5-10 million.  Spend per trip increased 7.8%, due primarily to strength in the international high-end segment.  Promotional allowances were also higher.
  • PREVIOUSLY:   "It's one of the challenges in this business, we're still facing the same number of guests, we're servicing the same number of visitors, putting them to bed, waking them up, parking their cars and alike, but the amount of revenue we enjoy is a bit diminished from that. And there is no reason that I can see in the immediate future that would suggest the general macroeconomic conditions that have led to that results are going to be much different."


  • SAME:  Horseshoe Cincinnati is planned to open Spring 2013
  • PREVIOUSLY:  "Horseshoe Cincinnati is well under construction. That's going to open at the end of the first quarter or early into the second quarter."


  • SAME:  The renovation of Imperial Palace was estimated to have reduced net revenues by approximately $10 million to $15 million.  CZR expects meaningful ADR improvement when all the renovations are done. 
  • PREVIOUSLY:  "We are going to renovate a large number of rooms next year in Las Vegas. If you were to ask, where we've cut back on maintenance capital for the last few years, it's really been in Las Vegas and it's primarily been in the room renovation category. So next year, we're planning to do a significant number of rooms, probably touching nearly all of the properties themselves. There will be a significant renovation at Caesars Palace of 550 rooms."


  • SAME:  Harrah's Baltimore is proceeding with plans to open a gaming facility in Baltimore in the middle of 2014. 
  • PREVIOUSLY:  "The State of Maryland's Video Lottery Facility Location Commission granted a license to our consortium, paving the way for us to begin building Harrah's Baltimore, which will feature 3,750 VLTs. The consortiums are beginning to seek necessary permit and construction is likely to begin in 2013 with an opening targeted for the second quarter of 2014."


  • SAME:  CZR expects to close the acquisition in 4Q.
  • PREVIOUSLY:  "We also announced that sale of Harrah's St. Louis, which we expect to close by the end of year."


  • SAME:  4Q won't see much difference from 3Q but CZR is encouraged by 2013 and 2014 trends.
  • PREVIOUSLY:  "I think the general trend remains favorable.... I doubt that much of that is going to change in the remainder of this year, but I think as we look forward to 2013, I think it's likely to be a little bit more encouraging."

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