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The shorts were right about Singapore but low hold is not good enough in the face of accelerating market trends, growing share in Macau and a more shareholder friendly capital deployment strategy.



It was pretty well understood that Singapore would miss consensus expectations.  While the magnitude of the miss was huge, it was mostly due to a very low hold percentage.  We think the good clearly outweighs the bad here for LVS.  Macau had a great Q3 and more importantly, market growth is accelerating.  Moreover, LVS’s market share is growing and we think that trend will continue consistently over the next year, similar to the ramp up of Galaxy Macau.  +20% market share in October was better than recent expectations and LVS may just be scratching the surface on share gains.  Is 22-24% share out of the question?  We don’t think so.  LVS’s announcement of a 40% increase in the dividend was a nice positive and we are encouraged with management’s enthusiasm for further dividend increases.  We think LVS will begin to attract a whole new investor base without losing interest from growth-oriented funds.  It’s not often you find a growth stock (wait until new international markets begin to open – South Korea?) with the kind of cash flow profile of LVS.  Strong cash flow, a willingness on the part of management to return that cash to shareholders and a potentially huge pipeline of high returning projects is a powerful combination.




Macau revenue and EBITDA came in 1% above the Street, but 4% below our EBITDA estimate.  We believe that most of the discrepancy vs. our numbers is attributable to unfavorable mix at FS & Sands Macau, along with weaker overall results at SCC, offset by slightly better results at Venetian. Based on our calculations, hold had minimal impact on EBITDA this quarter—a $3.5MM benefit.  Sands China held at 2.81% across the portfolio. Direct play was 17%. 


Venetian Macau

  • After poor results in 2Q, Venetian bounced back this quarter, reporting EBITDA 8% above consensus and 1% above our projection
  • We estimate that high hold benefited the quarter by $28MM on net revenue and $16MM on EBITDA
    • Venetian historical hold rate since opening has been 2.93% vs. 3.32% in 3Q.
  • Direct play increased to 30% of total RC drop
  • Rebates were 32.2% of win or 107bps
  • Variable expenses of $355MM
    • $308MM of gaming taxes
    • $27MM of estimated junket commissions
  • Estimated fixed expenses of $94MM, up 10% YoY but down $2MM QoQ

Four Seasons

  • Four Seasons produced a disappointing Q missing our EBITDA estimate and the Street’s by 18%
  • We knew that hold would be poor, so what drove the miss?
    • Higher rebates/junket commissions
    • We suspect that not only was hold poor, but the mix was also unfavorable.  Otherwise, costs just went through the roof –which is less likely.
  • We estimate that low hold negatively impacted Four Seasons EBITDA by $3MM.
    • Four Seasons’s historical hold rate since opening has been 2.74% vs. 2.58% in 2Q.
  • Direct play was 16% of total RC drop, consistent with 1H levels
  • Rebates were 35.5% of win or 92bps
  • Variable expenses of $140MM
    • $108MM of gaming taxes
    • $25MM of estimated junket commissions
  • Estimated fixed expenses of $23MM, up 21% YoY

Sands Macau

  • Sands came in below our number, despite having better revenues.  We suspect that mix may have been unfavorable, or fixed costs were just higher than we expected.
  • Hold of 2.96% is just 2bps above Sands’ historical hold rate of 2.94% so any benefit to EBITDA was likely immaterial
  • Direct play fell to 8% of total RC drop
  • Rebates were 36.1% of win or 107bps
  • Variable expenses of $175MM
    • $148MM of gaming taxes
    • $17MM of estimated junket commissions
  • Estimated fixed expenses of $55MM, down 5% YoY but up $8MM QoQ

Sands Cotai Central

  • SCC EBITDA was 10% below our estimate and the Street's
  • Revenues were $23MM below our estimate
    • Net gaming revenues were $17MM below our estimate
      • Direct play was lower than we estimated but hold was in-line, causing $6MM less of gross VIP win
      • Rebates were also higher than we estimated, accounting for another $5MM of lower results
        • 38% or 87bps vs. our estimate of 34% or 79bps
      • Mass table revenues were $6MM lower than we estimated due to lower table hold
  • Net non-gaming revenue was $6MM below our estimate due to lower F&B and other revenues and higher promotional expenses
  • We estimate that low hold negatively impacted EBITDA by $9MM
    • We used a 2.85% rate to normalize EBITDA
  • Direct play of 9% of total RC drop
  • Variable expenses of $157MM
    • $137MM of gaming taxes
    • $14MM of estimated junket commissions
  • Estimated fixed expenses of $54MM, just $2MM above 2Q



  • While a miss in Singapore was not likely a surprise, a miss of this magnitude definitely led to some jaw drops. Most of the miss vs. the whisper number was hold-related, although trends across the board were disappointing
  • 3Q saw continued deceleration from 2Q
    • Slot handle was fell 6% YoY – the first YoY decline-- and 4% QoQ.  Slot handle has been slowly declining since 3Q11.
      • 3Q11 slot handle ($MM): $2,793
      • 4Q11 slot handle ($MM): $2,745
      • 1Q12 slot handle ($MM): $2,741
      • 2Q12 slot handle ($MM): $2,741
      • 3Q12 slot handle ($MM): $2,621
  • Mass drop decreased 6%- the first YoY decline since opening
    • Over the last 6 quarters, mass drop has fluctuated between $1,115MM and $1,206MM (8% range)
  • RC volumes declined 29% YoY, marking the 2nd Q in a row of declines
  • There were YoY declines in F&B, convention, retail and other revenues
  • Since the hotel is already running at full capacity, and rates are already at $360/night, there likely is not much upside from here as far as hotel revenues go.  The lack of hotel rooms is a general constraint for growing the Singapore gaming market
  • The hold impact of $105MM on EBITDA that LVS indicated in their release was in-line with our calculation
  • The rebate increased to 1.26%
  • Promotional spending decreased a bit to 21% of non-gaming revenue
  • Variable expenses were $104MM
    • GST: $31MM
    • Gaming tax: $68MM
  • We estimate that fixed expenses were $260MM, up 5% YoY



  • Vegas net revenue and EBITDA came in 2% and 5% ahead of our estimate.  The “strength” in Vegas was entirely driven by some Asian play and high hold. 
  • Over the past 4 years, average table hold for LVS in LV has been 19%.  We estimate that high hold benefited EBITDA in the quarter by $39MM
  • The rebate rate was 6.1% (vs. 5.2% last year and 3.8% in 2Q12)
  • Promotional expenses were 11.2% of GGR, much lower than last quarter's 17.6%
  • Operating expenses, excluding taxes, increased 4% YoY to $252MM 


Takeaway: Within casual dining, we are bearish on DRI, BLMN, TXRH, and BWLD.

Employment data released this morning by the Bureau of Labor Statistics suggest near-term strength for Quick Service and Fast Casual trends.  Full-service employment growth suggests a possible stabilization in hiring trends.  Our view is that casual dining trends decelerated in October versus September.  Knapp Track Casual Dining sales data track BLS employment growth data for the full-service and leisure and hospitality industries.  Within casual dining, we are bearish on DRI, BLMN, TXRH, and BWLD.


BLS DATA SHOWS QSR HIRING ACCELERATING (Corrected) - knapp vs leisure   hospitality


BLS DATA SHOWS QSR HIRING ACCELERATING (Corrected) - knapp vs full service emp growth



Employment by Age

Employment growth among 20-24 YOA cohort, which has been highlighted by many QSR and fast casual management teams as an important source of demand, decelerated to 1.4% year-over-year in October from 3% in September.  Employment growth among 55-64 year olds accelerated, sequentially, in October to 5.4% from 3.6% in September.  If this acceleration were to continue, it would be a positive signal for casual dining sales.





Industry Hiring


The Leisure & Hospitality employment data, which leads the narrower food service data by one month, suggests that employment growth in the food service industry may have tracked sideways-to-down in September.  On a sequential basis, the Leisure & Hospitality employment data registered a month-over-month gain of 11k (second chart below).   As the first chart of this post illustrates, the trend of employment growth within the Leisure & Hospitality seems to be stabilizing at roughly 2%.


Sequential Moves


Leisure & Hospitality: Employment growth at +2.54% in October, down 2 bps versus September

Limited Service: Employment growth at 2.7% in September, up 56 bps versus August

Full Service: Employment growth at 4.4% in September, up 22 bps versus August


BLS DATA SHOWS QSR HIRING ACCELERATING (Corrected) - restaurant employment


BLS DATA SHOWS QSR HIRING ACCELERATING (Corrected) - leisure   hospitality


Howard Penney

Managing Director


Rory Green


Still Dicey: SP500 Levels, Refreshed

Takeaway: The market is doing precisely what it should here – confuse people.

POSITIONS: Long Utilities (XLU), Short Industrials (XLI)


The market is doing precisely what it should here – confuse people.


Don’t forget that the market has really only had 1 up day in the last 8, so there’s still plenty of anxiety post The Bernanke Top (SEP14) and a ratty October (Tech -6.3%). We’ve recaptured the TREND (1419) line, but failed at the TRADE (1432) line – so there’s plenty of risk to consider into the Election.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1432
  2. Intermediate-term TREND support = 1419
  3. Immediate-term TRADE support = 1392


In other words, the immediate-term Risk Range is now 1 (a little tighter day over day, which is bullish) and the trigger line for beta  remains 1419.


Strong Dollar (down Gold, Commodity Bubbles, etc.) continues to price in that the media’s political “experts” (polls) may have the Election wrong. Only time will tell. In the meantime, we’ll let the market tell us what to do next.




Keith R. McCullough
Chief Executive Officer


Still Dicey: SP500 Levels, Refreshed - SPX

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RL: Focused As Ever

Takeaway: RL’s not cheap at 20x. But valuation – high or low – is not a catalyst. RL is as focused as we’ve ever seen. Tough to bet against it.

Ralph pulled another Ralph by simply smoking the consensus with an adjusted $2.45 vs the Street at $2.15E. As good as this was, let’s not be blind to the fact that company lowered guidance for the Street would come in 10% below last year. In reality, earnings were about flat (excluding a one-time tax hit), which is nothing to write home about for a growth company. Of course, RL tempered guidance in 2H – not because it should, but because it could. Let’s face some facts…the company guided for Gross Margins to be down this quarter -175bps-225bps, and yet they actually came in UP by +29bps. They likely felt the need to keep estimates grounded and looked for the best place, which is the top line.

Past the expectations game, there was something that jumped out at us pretty clearly – which was the sheer number of strategic initiatives going on inside the company right now. For people who think that that it can’t grow organically anymore, there’s enough brewing today that should prove themwrong for quarters to come. For example…

  • Launching Japan e-commerce this past quarter
  • Continuing to alter the Chinese retail footprint – a massive undertaking
  • Closing the Argentina business
  • Closing Rugby. This has been a Halo brand for the college crowd, but the reality is that a) it is not making money and b) Roger thinks that he can do a better job with his core brand. (We love when companies close ancillary concepts to re-direct capital to the core). With 14 stores and its associated e-commerce business, we estimate this to be only a $20-$25mm business equating to a ~30bps top-line hit (though margin enhancing).
  • Accelerating growth in Denim & Supply
  • Increasing distribution of accessories category with key partners
  • Likely evaluating Chaps, which is about a $400mm business at retail. Chaps is currently in the hands of Warnaco, which is being acquired by PVH. There’s a change of control provision in the contract. You can bet your bottom dollar that RL will either negotiate a higher royalty, higher investment hurdles, or will take the brand in-house.
  • All of this is happening at the time when Chris Peterson is taking the reigns as the company’s new CFO (we think that his pedigree represents a significant upgrade in the role of CFO inside RL – they nabbed one of the most eligible candidates in corporate America).

So yes, actual growth was nonexistent in the quarter, but with Gross Margins expansion more than offsetting continued SG&A investment spending and top-line likely continuing on their current trajectory, EPS and cash flow should re- accelerate to a 20%+ rate in 2H versus 0% in 1H. This should carry into next FY as the initiatives above start to bear fruit. We’re realistically looking at $8.00 this year and between $9.00 and $9.25 next year. There’s no way we could call RL cheap at 20x 12-month forward earnings. But valuation – either high or low – is not a catalyst. RL is about as focused a company as we’ve ever seen it. It’s tough to bet against a company like this.

What Drove the Beat:

While top-line results declined slightly less than expected, gross margin improvement more than offset higher investment spending driving upside in the quarter and EPS of $2.45 (adj for $0.16 in 1x discrete tax item) vs $2.05E.

RL: Focused As Ever - RL S


Accountability and Outlook: Here’s a look at RL’s variance between guidance and actual, as well as
outlook for F13 vs expectations:


RL: Focused As Ever - RL Outlook Table


Highlights from the Call:


Tale of Two Halves: While margin performance came in better than expected, still expect further improvement in 2H


Impact of Sandy:

  • 81 stores (~20% of store base) closed
  • e-commerce interruptions
  • Reopenings staggered through the week
  • Approximately 12 stores still closed
  • Have lost modest Q3 revs so far and expect some lingering impact

Closing Rugby Concept:

  • Have decided to close the Rugby brand
  • Closing 14 related stores and e-commerce site
  • Expect pretax charges of $20-$30mm in 2H (75% in Q3)

Regional Performance:

  • Americas remain strong
  • Securing incremental distribution with key partners (handbags, footwear, D&S, etc)
  • Europe still challenging - South more than North
    • Will look to change demand as it materializes
  • Asia operating environment has been softer than they accounted for
    • Performance at free standing stores outperforming wholesale doors
    • Upgrading shop locations and assortments
    • Opened 7 new stores in region (expect 14 in 2H)
    • Launched .com in 2Q in Japan

Core Polo Brand Positioning:

  • Looking to accelerate its positioning and evaluating growth opportunities - primarily int'l
  • Could be in form of increased distribution, marketing, and branding ideas
  • 'I think you'll hear more to come in the next couple quarters about strategies we hope to employ to focus on those.'

China/Asia Store Growth:

  • Pace of opening in Asia - have opened 7 in 1H (tgt of 20 in F13) on pace for another ~13 stores in 2H
  • Primarily located in malls
  • Flagship opportunities are harder to come by
  • Most stores this year in 5k-10k sq. ft. range
  • Should have a good read on customer by middle of the spring

Gas Prices, Hurricanes And Dining Out

Nationwide, gasoline prices have declined -1.3% week-over-week. However, it’s worth noting that the Northeast will be affected by a shortage of gas in the aftermath of Hurricane Sandy. Sandy will likely impact restaurant traffic trends over the next few weeks, similar to what happened in the South post-Katrina. Tight gasoline supplies led to a decrease in miles driven which, in turn, led to a deceleration in restaurant traffic.


Gas Prices, Hurricanes And Dining Out  - retailGAS

Where's The Beef?

Your favorite fast food joints and restaurants are likely to pass the rising cost of beef on to you sooner or later. Thank Ben Bernanke for devaluing the dollar and inflating the commodity bubble. As you can see, year-over-year, live cattle prices have skyrocketed from $85 to over $125. Higher prices are a negative for everyone from Jack In The Box (JACK) to Wendy’s (WEN) to Chipotle (CMG) to Bloomin’ Brands (BLMN). The fundamental outlook suggests that the strength in beef prices should continue for some time. 


Where's The Beef? - live cattle

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