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BBBY: INSIDER SALES WARRANT A DEEPER LOOK

Co-chairman/founder’s Eisenberg and Feinstein sold 2.15 million shares on 4/09, the largest sale by insiders over the past five years.  The shares represent approximately 20% of their direct and indirect holdings, not accounting for any options.  The absolute number of shares is eye-opening by historical standards – even though the entire amount was sold by their trusts with a lesser portion sold by their charitable foundations. Additional executives, including the CEO, also reported sales resulting from option exercises that were all slated to expire by the end of this year.

 

Overall, the 13 insiders retain a 4% position in the company, making them the 6th largest holders of company shares.

 

Alright, let’s face some facts. I’m never thrilled to see that level of sales activity. If they are selling, then why should I buy?  There are three reasons I’m not overly concerned about the activity.

1)      The stock doubled over four months and is up 60% in 6 weeks. If I were them I might sell some stock too.  

2)      History suggests that management has not been particularly good with timing of stock trades (see chart). It’s a good thing that they manage retail stores instead of portfolios.

3)      Lastly, and most importantly, BBBY management, like most management teams I know in Consumer, does not ‘do macro.’  These guys are basing their forecasts on bottom-up models with a loose macro beacon set by Wall Street research. Based on the collective work of our industry and Macro teams, we think that the softline retail supply chain will have a tailwind for much of the next year. I don’t think that management appreciates that yet. See our recent research on the topic for more color.


BBBY: INSIDER SALES WARRANT A DEEPER LOOK - bbby insider chart


LVS: Q1 SHOULD LOOK BETTER THAN WYNN’S

The LVS Q1 shouldn’t be awful.  In fact, it could surprise the Street on the upside.  Our revenue, EBITDA, and EPS estimates are above the Street consensus.  What will drive the upside?

  • Easy comparison – Palazzo generated only $120 and $18 million in revenue and EBITDA, respectively, in Q1 2008 as the property was still ramping.  By contrast, Q4 Palazzo EBITDA climbed to $42 million, a seasonally similar quarter to Q1.  It doesn’t appear the Street is factoring in last year’s slow ramp.
  • High convention exposure – Room rates and occupancy should look very strong relative to the rest of the Strip due to the long booking windows of this business.
  • Macau – The Macau numbers were much better than expected in Q1 and The Venetian grabbed its fair share.  We’ve got a good idea of The Venetian’s Q1 revenues and based on those numbers, property EBITDA should be up significantly from last year’s $108 million.
  • Cost Cutting – LVS is probably much farther along than most people think.  See discussion below.

 


LVS: Q1 SHOULD LOOK BETTER THAN WYNN’S - LVS Q1


We remain positive on the Macau prospects going forward.  Unfortunately, the rest of the quarters won’t look as good as Q1 in Las Vegas for LVS.  Q2 shouldn’t be awful but the convention business seasonally dissipates in Q3.  A pure leisure environment won’t be good for room rates.  The convention business reemerges in Q4 but bookings do not look very good.  This will be a very difficult quarter for Venetian/Palazzo in Las Vegas.

Margins appear to be the most underrated piece of the LVS long thesis.  Sheldon Adelson recently upped the ante from initial targeted cost cuts of $250 million to $470 million.  Relative to the $890 million in total company EBITDA generated in 2008, this is a huge number, maybe too big.  See the chart below.  The Street is obviously very skeptical.  However, the cost cutting strategy appears to be better thought out than we initially thought.  In other words, we’re not so sure that this was just Mr. Adelson “blowing smoke”.  There seems to be more input from the rest of the (remaining) executive team.  Here are some details:

  • $180MM of cuts at the US entity:
    • Cutting everything that’s not making money
    • Cut 285 employees at corporate in the most recent round of cuts
    • Will likely shut down the few retail outlets they operate
    • Lower end customer expects less so in theory shouldn’t really damage the brand or guest experience
    • Replacing “older slot guys” with fresh graduates that are more productive (so 1 for every 3 that are fired)

 

  • $270MM cost cuts in Macau
    • Got rid of 1000 construction workers on Sites 5&6
    • Better sharing of infrastructure btw Sands & Venetian
    • Had over 300 people in the marketing department alone

 

  • $20MM of cuts at corporate
    • Hiring several in house attorneys to reduce the millions spent on outside council


LVS: Q1 SHOULD LOOK BETTER THAN WYNN’S - LVS planned cost cuts


2009 – EYE ON FOOD COSTS

Tracking commodity and labor cost trends is even more important as casual dining companies continue to beat EPS expectations on better margin performance.  With top-line trends remaining weak (Malcolm Knapp reported last week that March casual dining same-store sales declined 4.9% with traffic down 6.5%), restaurant operators are focused more than ever on cost management.  Although slowing new unit growth and a renewed focus on operating more efficiently have allowed restaurant operators to cut costs, the YOY roll over in commodity costs has been a necessary component of recent margin and earnings outperformance within casual dining.  During the fourth quarter, average full-service restaurant (FSR) food costs declined as a percent of sales on a YOY basis for the first time since 3Q07 and declined the most they have since 4Q06.  For casual dining margins to continue to improve, it is necessary that commodity prices remain a YOY tailwind in Q1 and Q2 as Q1 same-store sales on average fell 4.3% (according to Malcolm Knapp), and I don’t think we will see a significant improvement in Q2 sales trends from the -3% to -5% levels. 

 

2009 – EYE ON FOOD COSTS - FSR Food Costs

 

Despite the food cost favorability in Q4 for casual dining companies, QSR companies on average have seen their food costs as a percent of sales increase for seven consecutive quarters.  QSR margins have been somewhat insulated from these commodity increases as sales have held up relative to casual dining, but QSR average EBIT margins have started to roll over, posting YOY declines for the last three quarters.  This seems less bad when compared to the 17 consecutive quarters of YOY EBIT margin declines posted by the FSR industry on average.  Casual dining sales are still declining, but they have improved on the margin, with the Q1 same-store sales decline of 4.3% being better than the 6.0% decline in Q4.  As I have said before, these marginally better casual dining sales will take market share from the QSR industry so QSR margins may be less protected from commodity cost variability. 

 

2009 – EYE ON FOOD COSTS - QSR Food Costs

 

That being said, food costs remain rather favorable on a year-over-year basis with only two commodities (chicken and pork) currently up on a YOY basis.  Even chicken prices, which are up 4% YOY, are trending down recently and are down 2% year-to-date.  Cattle prices, on the other hand, are still down 1% YOY but have moved up about 5.5% in the last two weeks and are up nearly 4% YTD.  Both soybean and gas prices are still extremely favorable on a YOY basis, down 22% and nearly 40%, respectively, but they have recently increased rather significantly.  Soybean prices are up 13% in the last two weeks and gas prices are up 27% YTD. 

 

2009 – EYE ON FOOD COSTS - April Commodity update


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Cheaper Swedish Meatballs?

POSITION: No Current Position

 

Sweden (like much of the Eurozone) is experiencing strong deflationary pressure as its recession stokes unemployment and saps output, exports, and consumer demand.  

 

CPI fell in March to 0.2% Y/Y, the lowest rate in four years, from 0.9% annually in February. Economists forecasted inflation to fall to 0.5%. This deflationary data will surely encourage the Swedish Central Bank (Riksbank) to cut interest rates when it meets next week. In interviews Riksbank Governor Stefan Ingves said he has not ruled out cutting rates to zero to guide the largest Nordic economy out of recession.

 

Despite Fitch Ratings AAA credit rating on Sweden’s sovereign debt there’s still uncertainty surrounding Swedish banks, many of which were primary lenders to the Baltic states, countries that are now in the deepest recession within Europe. The resulting $100 Billion of Swedish bank write-offs will continue to strain government budgets and lending. The economy has suffered greatly from the pullback in export demand from the Eurozone, in particular in the car industry. Cash-strapped GM and Ford are presently looking for buyers for Saab and Volvo due to unprofitable sales. For a country of 9 Million, the estimated 15-20K jobs GM provides in Sweden is a number not to be overlooked.

 

From a monetary standpoint, the Central Bank is running out of room to cut the interest rate, which stands at 1%, to help lessen the downturn for an economy forecast to decline 4.2% this year. We do not have a position in Sweden or in Scandinavia and believe recovery in the region and throughout Western Europe should lag the US’s.

 

Matthew Hedrick
Analyst

 

Cheaper Swedish Meatballs? - schwe


FEEDING THE OX 2

POSITION: Long Oil via the etf USO

 

China is aggressively  lining up its energy needs, with an announced $10 Billion minority stake in Kazakhstan’s state-owned oil company to be finalized during Kazakh President Nazarbayev’s visit to Beijing on April 15th. Russia stands to lose on the deal, both strategically as a former satellite leaves its orbit and competitively as Chinese capital helps increase Kazakh production.

 

Back in mid February we pointed out the importance of the $25 Billion China lent two of Russia’s main oil companies in exchange for 20 years of supply.  China may now benefit from multiple oil supply lines and the ability to play Russia and Kazakhstan off one another for price if the deal is consummated. Politically Putin & Co. will be reminded that China is wearing the pants.

 

With $1.95 Trillion in currency reserves, China has the cash to do the deal and may even get it done at a considerable discount due to the price destruction of crude since last summer. Further, the Kazakh economy is desperately in need of international support for its crumbling economy. Kazakhstan’s government has taken control of the country’s largest bank, BTA Bank, and the global recession has eroded demand for Kazakh oil. Should the deal get done, China is setting itself up well for greater control over its energy needs. 

 

One of our major themes for 2009 is owning what THE client (China) needs. As China ramps up its infrastructure expansion, countries that can supply China with the commodities it needs to grow will benefit, and we have position our portfolio accordingly. 

 

Matthew Hedrick
Analyst

 

Andrew Barber
Director

 

FEEDING THE OX 2 - kaz1

 

FEEDING THE OX 2 - kaz2


FEEDING THE OX

Singapore exports data underscores expanding demand from the customer

 

Singapore’s preliminary GDP data for last month paints a grim picture.  At -11.5%, the March figure released yesterday is the worst year-over-year reading since at least 1976 leading to a statement from the Trade Ministry today, following the release of equally abysmal export data, predicting that Singapore’s Economy may contract by 6 to 9% this year. March non-oil exports registered at a modest sequential improvement of -16.97% Y/Y or +22.35% M/M.

 

FEEDING THE OX - aaaw1

 

As the primary entrepot economy in South East Asia, Singapore has long served as a canary in the coal mine for changing Asia/Pacific trade trends.  Although the misery of global contraction is clearly baked in for Singapore, the regional and product export break out released today suggest that the one place where business is improving is facing the customer –exports to China and Hong Kong both increased by double digits on a month-over-month basis, the second sequential m/m increase for China  bound shipments.

 

FEEDING THE OX - awww5

 

Although the China bound exports of electronics and other consumer products remain in the doldrums, the increase in transport equipment and chemicals clearly supports the thesis that Chinese demand is gaining momentum as Beijing’s massive stimulus program works through the system.  Although we sold our China ETF position last month to lock in profits we continue to be bullish on the path of recovery there and have adjusted our portfolio around the theme of increasing demand there by taking long  positions in commodities and commodity centric economies. 

 

We do not have an investment opinion on Singapore’s markets.

 

Andrew Barber
Director


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