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Takeaway: We were cautious on the ability of SBUX to deliver in 4QFY12. The company delivered and demonstrated its growth capability.

Starbucks exceeded our, and the Street’s, expectations during 4QFY12.  The Americas division offset slower international revenue growth as earnings came in at $0.46 versus $0.45 consensus.  The dividend was increased 24% from $0.17 per share to $0.21.  We were advising caution ahead of the quarter, mistakenly, as our concerns about trends sequentially decelerating in the Americas dictated our view of the quarter.  This quarter, and management's commentary, has demonstrated to us that Starbucks is managing its growth accordingly.  The opportunities for the company are vast and 4QFY12 results suggested that management is likely to continue to achieve its goals over the coming months.


We backed away from our years-old bullish stance on Starbucks in April based on our concerns around the company’s ability to manage a large portfolio of brands while managing its already-complex business model.  Management’s commentary on the conference call communicated to us an acute awareness of the challenges that growth presents and a willingness to invest proportionately alongside the company’s expansion.  CEO Howard Schultz’ reluctance to reciprocate some analysts’ exuberant expectations demonstrated a sober and grounded approach on the part of management.  Below is a telling quote from Schultz that directly addressed the concerns we have expressed on the company’s rate of growth:


“We've been able to thread the needle to maintain and preserve and enhance our premium position as a premium brand while at the same time developing, offering and creating value propositions for our customers that in no way dilute the equity of the brand… we are highly confident that despite any turn in the current economy that we can anticipate, that we have the tools, the resources, and most importantly the power in the marketplace to navigate through this by what we've been able to learn and the muscle memory that is inside the DNA of the company since transforming the company in 2008.”

Below we go through the results and FY13 outlook provided by management.


4QFY12 Recap


Revenues for the fourth quarter were slightly below expectations but grew at 11% versus 4QFY11 with same-store sales in the Americas providing a substantial upside surprise.



  • SSS growth of 7% vs 5% consensus
  • Treat Receipt promotion in August a success
  • Living Social offer was availed of by 1.5 million customers in less than 24 hours
  • Nearly 500 million K-Cups were shipped in FY12, 15.6% of single cup market
  • Technology playing an increasing role in driving top line
  • Channel development continuing to support sales – blonde roast, refreshers
  • $3 billion loaded onto Starbucks cards in FY12



  • Sales grew 23% y/y boosted by new units and 10% comps
  • Co-op markets – China, Thailand, Singapore, and Australia – had positive comps
  • Management positive on the rate of volume growth in China
  • Unit growth in the quarter was 18.2%



  • SSS growth of -1% vs 1% consensus
  • FX was a drag
  • Softness in Germany was offset by positive SSS in UK despite poor traffic during Olympics
  •  EMEA team has embarked on a “Renaissance Plan”, focused on transforming all areas of the business
  • Launched My Starbucks Reward program in select markets

Operating Margin

  • Strong sales and operating efficiency in the U.S.
    • Targeting labor schedules
    • Increased sales leverage over fixed costs
    • Commodity costs didn’t have a material impact on margins in 4Q
  • CAP margins continue to improve on double-digit comps
  • EMEA is targeting mid-teen margins over the longer-term



  • FY13 EPS expected to be $2.15 versus $2.06 prior
  • 15-20% growth each quarter with 1QFY13 at low end due to leadership conference and Verismo launch
  • Targeting revenue growth in the range of 10-13% with MSD comps and 1300 net new stores
    • Further acceleration in CAP growth
    • 2,000 remodels in FY12 and 2,000 more planned in FY13
  • Verismo will be expanded to pursue the multibillion dollar global opportunity


SBUX THREADS THE NEEDLE - sbux earnings report card











Howard Penney

Managing Director


Rory Green




Takeaway: We believe the quarter is not the story. Singapore should stabilize and Macau growth is accelerating, as is market share for LVS.

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:  Singapore missed expectations even on a hold adjusted basis.  However, Macau was better and the dividend was raised.  We believe the quarter is not the story.  Singapore should stabilize and Macau growth is accelerating, as is market share for LVS.


  • BETTER:  LVS raised its quarterly dividend by 40% to $0.35 per common share, or $1.40 per common share per year, beginning in 1Q 2013.  
  • PREVIOUSLY:  "I'd like to see some more dividends"


  • WORSE:  Sands Cotai Central EBITDA margins fell from 19.5% to 18.1%.  Lower than expected VIP hold (2.28%) and mass hold (20.7%) impacted results. 
  • PREVIOUSLY:  "We think that we've got some opportunities to grow margins obviously with the initial margin at the Sands Cotai Central being a little bit below what our historical margins are at the Venetian as a result of the mix of business being more heavily weighted toward VIP. We think as the mass market grows, both at Sands Cotai Central and really across the portfolio of properties in Macao, with the mass margins being significantly higher than the VIP margins, that we would anticipate margin expansion on a consolidated basis."


  • BETTER:  Hotel occupancy reached 88.9% during the quarter with ADR of $149. 
  • PREVIOUSLY:  "The hotels are enjoying strong occupancy, including 61% in April, 74% in May, 85% for the month of June, and the ramp continues into July."


  • SAME:  The connecting bridge is expected to be completed in December.
  • PREVIOUSLY:  "The air conditioned walk-over bridge connecting the Venetian and Four Seasons to Cotai Central opens in January of 2013."


  • SAME:  Mass drop per day increased to $6 million from $5 million in 2Q.
  • PREVIOUSLY:  "We believe that that segment will continue to grow and we believe we'll be a player in each of the three sub segments because of the amount of tables we have to offer, the rooms, the retail, especially Sands Cotai Central is built for that." 


  • WORSE:  A $15 million increase in the provision for accounts receivable adversely impact property EBITDA by ~$15 million.
  • PREVIOUSLY:  "We've continued to collect from the junkets as we have in the past and really see no deterioration from that perspective. Our reserves are growing a little bit just from a prudency standpoint. Against that total amount of receivables, we've got about a 15% reserve that's outstanding."


  • SAME:  LVS had some group cancellations in 3Q but 2013 group bookings are improving.
  • PREVIOUSLY: "Group rooms business and pricing is picking up for 2013. We are investing for the future in Las Vegas, renovating 1,000 rooms in our Venezia tower, remodeling and redesigning the gaming floor at the Venetian, and introducing a whole new entertainment offering in the fall."3




“Following a period of transition and re-focus on the development of products that address customers’ near-term needs, our newest for-sale and participation games continue to re-establish WMS’ excellence in the creation of differentiated content and games that deliver value to our customers. Over the next three quarters, we will begin to commercialize our latest games and platforms which were introduced to broad acclaim at the recent Global Gaming Expo. We believe these products are among the most exciting new games and cabinets we have brought to market and expect them to provide casino operators with new must-have products for their players."


-  Brian R. Gamache, Chairman and Chief Executive Officer




  • Expect to ship at least a 1,000 additional VLT's to Canada in the balance of  FY13 and additional units in FY14
  • Shipped 193 units to IL 
  • According to Gamache, WMS has never gotten better feedback on their products from G2E.  This reminds him of 2006 or 2008 when they launched BB2.
  • CPU-NXT3 operating system is already approved and the Gamefield xD cabinet has already submitted and is approved in some jurisdictions already.  Expect to submit the Blade cabinet later this month.  Anticipate shipping the first units of both these new unique cabinets which utilizes CPU-NXT3 platform in the March quarter.
  • MyPoker launched this quarter at Station's properties in LV and expect to roll out out more units with CZR in the regional markets in the March Q
  • Expect their ship share to new markets to average in the high teens. 
  • Expect their ASPs to be more variable in 2013 especially if IL VGTs become a larger percentage of the mix
  • Used game sales were higher, they are beginning to sell BB2 used game machines which garner higher prices.
  • The improvement in gaming content during the past year has resulted in higher than normal conversion kit sales over the last five quarters, and expect this will continue at least through the launch of the Blade cabinet.

  • Have 17 new participation games launching in the balance in FY13; therefore, they expected continued growth in their participation base and average daily revenue to begin improving in 2H13
  • About 70% of WMS's installed base has been upgraded to new hardware and operating system platforms, with just under 35% of the installed base having the latest games that were launched in the last three quarters.
  • R&D in the 15-16% of total revenues range in FY13, decreasing throughout the year as revenues ramp
  • Selling & Admin expenses declined YoY largely reflecting the impact in the prior year of $4.3MM of incremental bad debt expense for Mexican customers

  • D&A is higher primarily due to a greater depreciation associated with a continued transition and upgrade of their installed participation base along with the growth in the installed footprint and the completion of a major facility plus amortization of Finite Life intangible assets from 2 acquisitions in the June Q
  • Expect R&D, D&A,  and G&A to increase in a measured way throughout the FY13. Total increase is expected to be $30-35MM. Expect the non-marketing expense amounts to ramp slightly every Q throughout the year, reflecting additional headcount to support additional revenue growth. Marketing to increase more significantly in December Q and then level out at 30-40% of Jackpot Party's Social Casino revenue.
  • They expect aggregate capex spend on gaming operations and PP&E to decrease by 20% in 2013
  • Repurchased 5MM of stock in the September Q (~317,300 shares) and have ~143MM remaining in the current repurchase authorization
  • Revenues are expected to grow modestly from the September Q to the December Q and to slightly exceed Dec 2011 revenues. However, lower margin VLTs are expected to exceed 25% of new units sold this quarter, resulting in the product sales margin declining to a range of 48% to 49%. Operating income is expected to be slightly down QoQ, reflecting an incremental cost to support interactive products and services. On an annual basis, benefits from our higher revenues this year will be offset by planned higher spending that support new product flow and the building of a foundation for interactive products and services.
  • Details on their i-gaming initiatives:
    • Online gaming operations: Real money UK-based platform Jackpot Party.com and distribution of the 888 B2B poker platform in the US  (Play for fun and real money when legalized)
      • Earn money from Jackpot Party.com from player net wins 
      • First roll-out of a fully managed B2B real money online casino site will be in collaboration with Groupe Partouche in Belgium, utilizing our JackpotParty.com platform and operating infrastructure. Soft launch this Q and full go-live in Jan 2013. They will earn money through a rev-share agreement.
    • iGaming Product line:  royalty-based content licensing via remote game server integration through Jadestone subsidiary. Content distribution to online gaming customers. Have agreements with Betson & Unibet.  They get revenue share dollars every time their games get played. Will go live in early calendar 2013.
    • Social gaming/play4fun initiatives (B2B):  Platform allows their bricks and mortar customers to offer play for fun on their site. They get go-live fees and recurring monthly fees. If gaming gets legalized, they can convert these sites.
    • Mobile games through Phanton EFX: 
    • Social gaming: Jackpot Party on FB 
      • 2 million monthly active users and with it 500,000 daily active users yielding a very nice engagement rate of about 25%.

      • Kaunched Jackpot Party Social casino in July and averaged just over $55,000 in net daily revenue to WMS
    • They will launch Jackpot Party Casino on mobile devices in the near future
    • Total investment to enter the online by WMS was under $100MM spread over several years
  • Expect additional ship share increases over the next several quarters and years



  • Over the next 12 months, they expect that replacements will continue to be "tough-sledding."  Have the best visibility that they have had in some time because of the new cabinet launch and the Canadian VLTs.
  • They believe that they have 120k BB1 and BB2 cabinets installed that need replacing and that the Blade cabinet will help spur that replacement cycle
  • They are in ramp up and investment mode in their interactive businesses.
  • Think that the 2H of 2013 will be more robust. New launches will be more accretive to their existing footprint. The one headwind they have is that coin-in isn't doing as well with lower play levels at casinos.  Feel like they are in a great position going into 2H... locked and loaded.
  • What was the one-time IL game set sale?  It was another VLT jurisdiction where they had a game set delivered, have another one of those opportunities coming later this year.
  • The closest to recurring revenues in interactive is the social gaming sites for 3rd parties which have recurring licensing fees (Game server integration)



  • "Net income and diluted earnings per share in the September 2012 quarter reflect higher year-over-year research and development expenses to support the growth of interactive products and services as well as for the ongoing development and commercialization of a greater number of new participation and for-sale games and cabinets."
  • "Gaming operations revenues increased... primarily reflecting growth in revenue from interactive products and services and the third consecutive quarter of growth in the installed participation base to 9,632 gaming machines... partially offset by lower gaming operations daily revenue per unit"
  • "Gaming operations gross margin was 78.6% in the September 2012 quarter compared with 79.1% in the prior year, reflecting the impact of higher jackpot expense on wide-area progressive games, partially offset by the benefit of increased revenues from high-margin interactive products and services"
  • "Product sales revenues rose modestly reflecting sales of 693 new video lottery terminals (VLTs) for the Canada and Illinois VLT markets. Product sales revenues also include higher other product sales revenues including one-time software revenues of a VLT game set and higher revenues from used gaming machine sales, which more than offset the anticipated lower industry-wide shipments for new casino openings and expansions and a lower average selling price reflecting the higher mix of lower-priced VLTs and the competitive marketplace."
  • Product sales details:
    • 3,791 new sales (2,453 NA & CA; International: 1,338)
      • NA new openings and expansions: 727
      • Replacements: 1,726
    • ASP: $16,033
    • Used games: 1,660
    • Conversion kits: 2,400
  • "A 120 basis point improvement in gross profit margin due to higher product sales margin and a greater mix of gaming operations revenues. Product sales gross margin was 53.1%, a fiscal first quarter record, reflecting the mix of business, ongoing benefits from the Company’s continuous improvement and supply chain management initiatives, and the VLT game set software, which more than offset the impact of a lower average selling price and the seasonally lower unit volumes for the September quarter that typically impacts margin." 
  • "WMS was selected by the Manitoba Lotteries Corporation to join two incumbent suppliers to replace existing VLT units throughout the province." 
  • "During the quarter, Jackpot Party® Social Casino was launched and became one of the five largest and most popular social casinos on Facebook®, as measured by the number of daily active users and monetization rates."
  • "In September, the Company’s first-of-its-kind interactive, casino-branded Play4Fun™Network went live at a tribal casino in Iowa, enabling the casino’s players to access multiple play-for-fun slot and casual games online, all under the casino’s own brand association."
  • “We are extremely pleased by the initial success we are achieving in leveraging the value of our library of proven gaming content into the interactive markets, including social, casual and mobile entertainment. This success is reflected in the $9 million year-over-year growth in revenue from interactive products and services, and we anticipate a range of $35-to-$40 million in annual revenue for fiscal 2013 from these revenue streams. While the costs needed to build a sustainable foundation for interactive products and services impact near-term operating profitability, we believe this investment favorably positions WMS to participate in the attractive, high-margin growth potential of these opportunities that can lead to the creation of new value for our shareholders.” 
  • "Revenue from interactive products and services increased to $9.5 million from $0.7 million in the prior-year period, primarily reflecting the successful July 2012 launch of Jackpot Party® Social Casino on Facebook®, which currently ranks among the five most popular social casinos onFacebook based on the number of daily active users, coupled with organic growth in our UK-based B2C online website and the addition of Phantom EFX retail sales and Jadestone game server integration revenues."


Takeaway: Still the best story in gaming

Singapore as advertised by the shorts but Macau strong and getting stronger. Dividend raise a plus.




  • Organic growth at existing properties: 3Q Macau market share 19.3%
  • Oct Macau Market share: >20%
  • 17% market share of RC volume for 3Q
  • Macau table productivity: win/mass/table increased 26% to $8.700 vs $6,900 (LVS is the market leader)
  • MBS: cost $105MM in EBITDA due to low hold; main customers: Singapore, Indonesia, Malaysia, HK, Taiwan, China, Japan, Korea, and Vietnam
  • SCC:  sees strong operating performance continuing in the quarters ahead as phase II ramps up; Holiday Inn, Conrad, and Sheraton are doing well.  Connecting bridge will open in December.
  • Parisian target opening: late 2015 or earlier
  • Are actively pursuing Japan, Korea and Vietnam.  Taiwan is taking more time.
  • Madrid: will only have projects that return above 20%
  • Parisan Macau: waiting for govt approval
  • Japan:  gaming legislation supposed to be submitted to the Diet in April 2013
  • Korea:  have met with local govt officials; have not negotiated tax rates; expect a 'Singaporean-type' of restriction on local play
  • Vietnam:  long process in Ho Chi Minh City 
  • Taiwan:  interested in the Mainland but process has been slow
  • Toronto:  have decided on location; needs the approval of Toronto City Council
  • South America (Brazil, Argentina), NYC (Queens):  have looked at opportunities there
  • Singapore:  VIP and mass volumes have been volatile in the last four quarters; hotel and MICE business have performed very well; there is rarely an empty room.  Retail has done well.
  • Las Vegas:  held very well; continues to be driven by Asian customers; had some group cancellations in 3Q but 2013 outlook looks stronger.
  • Sands Bethlehem:  Hotel was sold out for the last 4 days
  • Hold-adjusted EPS was 53 cents
  • Only $100mm debt due in remaining 2012 and 2013; interest at 2.9%
  • Net debt/EBITDA: 1.9x
  • Comfortable with net leverage ratio of 3-3.5x if international opportunities present itself



  • Macau SSS growth rate:  should accelerate in the future.  
  • Mass/ETG/slots:  getting more share by the quarter
  • Singapore:  flat in the VIP segment in the last 4 quarters; VIP growth is a challenge; Mass/ETG also challenging. Will be targeting $10-20K premium mass customer into MBS---believes that segment is the growth for the future
  • SCC:  January is the date for additional tables
  • S'pore RC volume:  customer demand was soft, has been in the $11-12 billion range recently. Goal is to go back to $15-16 billion range. 
  • Singapore looks like a $45-50 billion rolling market
  • VIP market in China is slowing...same deceleration in Singapore.
  • 24 new stores opening in Four Seasons, opening 43 new stores in SCC; a mall will open next to Sheraton
  • SCC:  very happy with the junkets there; mass tables have been slow due to strong performance from Venetian. Goal is $10k win/mass table/day--what Venetian did in 3Q
  • SCC margins were hurt due to lack of premium mass
  • 3Q Direct Play at Four Seasons: 16% vs 37%
  • Lot 3:  govt has said they will give more tables to people who build more non-gaming--they want 10% casino, 90% non-gaming property composition.  LVS is confident they will get 500 tables but may get 450.
  • SCC:  reallocating space for premium mass
  • Europe:  gaming tax will be relatively low
  • NYC market:  Willets Point in Queen 
  • Macau: premium mass vs regular mass margins-- 40s, not much difference between tiers
  • Singapore: premium mass vs regular mass margins--high 60s, also not much difference between tiers




  • Raised quarterly dividend by 40% to $0.35 per common share, or $1.40 per common share per year, beginning in 1Q 2013
  • Hold-adjusted EBITDA: $950.7 million
  • Consolidated adjusted property margin of 32.4% vs 38.4 in 3Q 2011
    • Due to lower hold (approximately $74 million adjusted property EBITDA impact) and increased provisions for accounts receivable (approximately $15 million in adjusted property EBITDA impact) in Singapore.
  • Sands China:  property EBITDA increased 24.3% to $485.6 million 
  •  MBS
    • Adjusted EBITDA $260.8 million; hold-adjusted EBITDA: $365.6 million
    • Rolling chip hold: 1.79%
    • Rolling chip volume dropped 30% YoY
    • Non-Rolling Chip drop decreased 5.7% to $1.13 billion
  • Las Vegas: adjusted property EBITDA of $98.2 million, an increase of 4.1% compared to the $94.3 million in 3Q 2011
    • Higher than expected table games win percentage of 28.1% for the quarter. Table games drop, which benefited from strong growth in baccarat play, increased 8.5% to a third quarter record of $581.5 million. Slot handle increased 1.7% to $498.4 million while slot hold percentage was 8.7%. Hotel ADR was flat compared to last year's quarter, although RevPAR decreased 5.6% due to a lower occupancy percentage.
  • D&A: $226.5 million
  • Net interest expense: $62.3 million
  • Unrestricted cash balances as of 3Q: $3.75 billion
  • Total debt outstanding, including the current portion, was $9.50 billion. Total principal payments for the remainder of 2012 and the full year 2013 are approximately $8.7 million and $97.5 million, respectively.
  • 3Q capex:  $327.3 million, including construction and development activities of $231.8 million in Macao, $79.8 million in Las Vegas, $10.9 million at Marina Bay Sands, and $4.8 million at Sands Bethlehem. 

Footwear, Nike UA winning. Apparel, TBL Losing.

Takeaway: Athletic FW is steadily growing while apparel is weak. $NKE is the steadiest of the bunch. UA looked great. Timberland/$VFC looks poor.

Athletic footwear continues strong last week, though we wish we could say the same about apparel. Keep in mind that neither of these datapoints was impacted by the storm. In fact, if anything we could argue that we should has seen some shopping (largely apparel) the days leading up to the storm. Nothing to be alarmed about, but we don't want to see this carry into next week. 


As it relates to Brands, Nike was 'steady as she goes' with a  high-teens growth rate in sell through. But the big surprise was UnderArmour, with 40%+ top line growth. That's about as good as we've seen from UA since it launched Spine.  One of the more troubling performances is Timberland, which has gotten sequentially worse over the past three weeks. One datapoint means little to us - three means a heck of a lot more. We'll look into it and be back to you. But keep this mind as it relates to what we think is an overextended VFC. 


Footwear, Nike UA winning. Apparel, TBL Losing. - 11 1 2012 5 49 28 PM


Takeaway: Buying an oversold WMT at $73 is better than chasing it at $77. Everything has a time and price. We’re going to keep a tight leash here.

Going long WMT here after a 30% 12-month run is one of the sleepier TRADE’s we’ve put on recently in retail. That’s especially the case when you take into account that all of the earnings upside in our model is coming from lower SG&A vs last year and lower share count. Hardly something to get super excited about. The historically low short interest coupled with the historically low Buy rating percentage probably cancel each other out. But how can we ignore that management has hardly sold a share since a 22% run stated off in March?


Per Keith… “Buying WMT at $73 at immediate-term TRADE oversold is better than chasing it at $77. Everything has a time and price. We’re going to keep a tight leash on this one.”




Short Interest Might Be Low, But The Sell-Side Does Not Like This Thing

TRADE ALERT: WMT??? - 11 1 2012 4 55 41 PM


Management Not Selling Despite The Run

TRADE ALERT: WMT??? - wmt3

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