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UA: Our Short Case On UA

Takeaway: Shorting UnderArmour is one of our top ideas at current levels. Revenue and profit growth should decouple, and the market is likely to care.

Conclusion: Shorting UnderArmour is one of our top ideas at current levels. Revenue and profit growth should decouple, and the market is likely to care. Timing matters on this one, as the company set itself up for a 1Q beat. Then we think the story should start to unfold. 



This type of idea definitely gives us initial pause given that we are such big believers in the UnderArmour Brand. But the reality is that a Brand ≠ Company ≠ Stock. And in this instance, we think that the Company is at a critical crossroads to get the Brand to the next level, and that will come at the expense of the stock – at least over the intermediate term.


Since the inception of UnderArmour, the company has grown Operating Profit about in line with sales. But we think that in order to capture the three areas of growth that are critical to maintaining UA’s top line trajectory – specifically a) women, b) International, and c) footwear – it needs to step up capital investment (specifically SG&A) and dilute margins.


Let’s be clear about something, this is perfectly normal for a company going through different stages of maturation. It’s not the result of gross mismanagement in the past.  Nonetheless, it is a growing pain that is apparent to us. Even if the margin dilution is only temporary, history shows us that a meaningful gap between revenue and EBIT growth creates clear multiple risk from current levels.

UA: Our Short Case On UA - chart1UA

UA: Our Short Case On UA - chart2UA


Let’s take a brief look at each of the three areas of growth:

1)      Women: Even though less than a third of UA apparel sales go to women, the brand has arguably done a good job in marketing to female consumers compared to Nike – which took the better part of 25-years to get to where it is today (still not perfect). But the challenge with women is that the level of competition in the athletic space has stepped up so severely. Brands like Lululemon highlight not only the product quality differences that women want, but also the different way women like to shop. Go into a Dick’s Sporting Goods (where the average dude shops) versus a Lululemon (nice atmosphere, great attention to color and fit, free alterations, complimentary yoga classes). We’re not saying that UA needs to become LULU. But are simply pointing out that more brands that already have wallet share for the average women – like Victoria’s Secret – are staking their claim in this space.
UA: Our Short Case On UA - chart3ua  


2)      International: About 7% of UA sales come outside of the US today, but about half of that is from Canada. As it relates to success outside the US we’re most interested in gauging sales outside of North America. While that’s not disclosed, we think that it is around 2-3% of total sales at best. There are a few things that make growing in Europe and Asia difficult.

  1. Sports Differences: First off, in the US, there are around a dozen sports an athletic brand can use with which to establish a link to the consumer. There’s Football, Basketball, Baseball, Hockey, Golf, NASCAR, Soccer, UFC, Boxing , Track, Tennis, and Extreme Sports. Outside of the US, there’s pretty much one – Soccer/Football. The problem there is that Nike and Adidas absolutely dominate this sport, with up to 90% of the market fairly evenly divided between them. There are brands like Puma and Umbro that are players in the market. But breaking in here is absolutely fierce. Nike and Adidas will defend their share – violently if necessary.
    UA: Our Short Case On UA - chart4ua
  2. No Attachment Product: It’s difficult to establish credibility in apparel in Europe and Asia without being equally as credible in footwear (like Nike) or in Fashion apparel (like Adidas). UA has neither.
  3. Lack of Homogeneous Markets: In the US, it’s pretty much the same experience for both the Consumer, the Retailer, and the Brand’s Salesforce for a shopping experience in LA, NY, Miami, or Chicago. That makes the US relatively easy to sell into.   But in Europe, every country is absolutely different, and even countries are vastly different based on region (think Northern vs. Southern Italy). Throw China into the mix, and it gets even more complex. The simple point is that the cost of building this business is steep.

    One might argue that this means that there are growth opportunities to go along with the higher costs. We’re the first to agree.   But unfortunately, costs need to come 1-2 years before the revenue is realized. That’s where we think we are today.

3)      Footwear: For the past 3.5 years UA has had Gene McCarthy, one of the most decorated brand builders in the footwear business, running its footwear operation. But after all this time, look at the chart below…It shows US athletic footwear market share. Do you see that little red bar a couple notches behind Private Label? That’s Under Armour. After all this time, UA still cannot pierce the 1% share mark in footwear.
UA: Our Short Case On UA - chart5ua


The problem here is that if we were to ask ten people what the single greatest opportunity is for UA over the next 3-5 years, we think that nine of them would say ‘footwear’. The bigger problem is that we asked this question 3 years ago and people still said ‘footwear’. This category has been a perennial opportunity for UA. Our sense is that only two things can unlock an opportunity. 1) leadership, or 2) capital.

We don’t think that there’s been a leadership problem under McCarthy. That leads us to think that there’s been a capital problem, and that if UA wants to succeed in this category it will need to step up its capital commitment to this  area and realize a Reebok-ish 8-9% EBIT margin (leading up to the Adibok merger Reebok had share between 6-10% in any given year – and a perennial goal of 20%).


What If We’re Wrong?

A major caveat here is that our fundamental call on the margins (or decelerating top line growth) needs to be right in order for this stock call to play out. The stock is sitting at about 33x the consensus estimate for 2013. While that’s still lofty, it’s far from unreasonable for a great Brand with no debt and blue sky opportunity if it can execute on its growth plan with no hiccups (which would sustain 20%+ EBIT growth).  If it is able to accelerate growth in these businesses, a 35-40x multiple on $2.00 in EPS power would not be unheard of. That’s a $70-$80 stock over 2-3 years. Definitely a nice return from its current $50. We don't think it will happen without a correction. But we need to be cognizant of plan B.


If We’re Right

If we’re right, and the market realizes that margins need to come down to sustain growth, then we could see estimates pushed back by a year, and a re-rating to something in the neighborhood of 20x EPS on $1.50. That gets us to about a $30 stock, or 40% downside, over a more compressed time frame.  


A VERY Important Point On Timing

We think that UA has the wind at its back headed into 1Q (March) earnings. The company managed to get the consensus down to $0.03 in the seasonally-weakest quarter – which compares to $0.14 last year and our estimate of $0.09. We don’t want to be pressing a short into a beat – even if it is an insignificant quarter. We’d either wait until the 1Q print, or until the trading factors change and tell us to get involved sooner.  




"Similar to other operators in the regional gaming industry, our results were impacted by softness in consumer spending, including the effect of payroll and income tax modifications early in the calendar year.  In addition, last winter was one of the mildest on record in the Midwest, while in contrast this winter we have had some measurable weather disruptions at key times, including New Year's Eve weekend." 


- Virginia McDowell, president and chief executive officer



  • Pleased that they are attracting customers from surrounding states at Cape Girardeau
  • Just over $1MM of pre-opening and development expenses impacted the quarter's operating loss
  • $10MM R/C, $491M on T/L, $350MM senior sub notes, $4MM of other debt
  • 5.7x leverage per covenant calc
  • $800k capitalized interest
  • Last year 4Q was a 14 week quarter



  • There's no particular market that they are dying to get into; aside from AC, there are no markets that they are avoiding like the plague
  • PA Gaming Control Board expects to announce the winner by year end.  If they win, they can roll their $25MM commitment into a loan to the property or into another part of the properties capital structure aside from equity.
  • Carrutherville and Missouri in general were impacted by bad weather over NYE's weekend. They did have some impact from Cape Girardeau (5-10% impact) at Carruthersville. They are now shifting how they are marketing the Cape property.
  • They would like to explore options to make Betterdorf a land based facility but they are far away from pulling the trigger
  • Renovation and upgrade to the floor in Boonville is coming later too
  • They opened in Cape Girardeau with stronger margins than they expected. They didn't do a lot of marketing. Wanted to see what the organic market was. In the past month they just started marketing to their database. Boonville and Waterloo are good comps for this property margin wise.
  • Thoughts on online and social gaming?  Think that they do a good job on the social front on Facebook and Twitter. Social is more of a marketing tool vs. true social gaming. They don't think that online gaming in the US will be very successful on a state by state basis. Not front burner issue for them.
  • The payroll tax increases coupled with delays in early filers have impacted them in the lower end of the database and in their retail play since the first of the year
  • Mississippi has been hit the hardest since they had the highest unemployment to start with
  • Confident that Iowa will look at the impact of cannabilization before looking at any new licenses
  • Any of their assets can be had at the right price. But there is nothing that they are looking to shed as non-core.



  • Consolidated EBITDA of $41.9MM
  • Cape Girardeau opened on October 30, 2012..."The property's appearance and experience has been extremely well received by customers, and our focus is now on the continuing ramp up in operational performance at the property."
  • "During the quarter...we completed the rebranding of our Vicksburgfacility to a Lady Luck and completed renovations to our main hotel tower in Lake Charles. We also began construction on Lady Luck Nemacolin and completed the sale of our Biloxi property on November 29, 2012.  We are beginning to see the positive impact from the capital projects we have completed, and are confident our strategy to revitalize our asset base is working."
  • "We are also very excited to have entered into an agreement with Tower Entertainment, LLC in Philadelphia, to manage its proposed, $700 million, luxury casino entertainment complex, The Provence, subject to the project being selected by the Pennsylvania Gaming Control Board."
  • Black Hawk: "Results were positively impacted by the continued impact of recent capital improvements at the properties and targeted marketing promotions."
  • Iowa results were negatively impacted by "inclement weather during the period"
  • Lake Charles: "The renovation of the hotel rooms in the main tower was completed during the period, causing some construction disruption that negatively impacted revenues; however, we were able to offset the impact through improvements to the cost structure, primarily from the consolidation of our operations to a single facility, after the sale of our second casino vessel in late fiscal 2012."
  • "Our new Cape Girardeau facility contributed $16.1 million in net revenues and $2.9 million in Adjusted EBITDA during the quarter and we are experiencing a steady ramp up in operations as we have increased our database marketing programs at the property." 
  • "Boonville results were negatively impacted by inclement weather over New Year's weekend"
  • "Caruthersville was impacted by both weather and the opening of Cape Girardeau."
  • "Results in Vicksburg were impacted by construction disruption early in the quarter and increased marketing costs associated with the Lady Luck rebrand launch."
  • "In Natchez, a new competitor opened in the market in December."
  • "In Lula, we were able to mostly mitigate continuing competitive challenges with approximately $1.1 million of decreases in gaming taxes, marketing and operating expenses." 
  • "Expect to open Lady Luck Nemacolin during summer 2013. The facility is planned to include 600 slot machines, 28 table games, an Otis & Henry's Bar & Grill, and a Lone Wolf Bar.  The Company currently expects the total project to cost approximately $57 million to $60 million, including the $12.5 million license fee." 
  • Cash: $67.8MM and total debt: $1.1BN
  • Capex: $34MM of which $19MM related to Cape Girardeau, $3.4MM related to Nemacolin
  • Capex 4Q13: $45-50MM, "including maintenance capital and construction costs in Nemacolin of approximately $25 million to $30 million"


In preparation for HST's F4Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  •  1,663-room Atlanta Marriott Marquis in Atlanta, GA for $293 million


  • Company holds a 33.4% interest, acquired five hotels from Whitehall comprising 1,733 rooms in two countries for approximately €440 million.  





  • "Not surprisingly, our larger group hotels, especially those in Boston and several resort markets, outperformed the overall portfolio."
  • "Looking at the fourth quarter and into next year, we continue to be encouraged by the positive trends in group business. While current booking activity or current quarter booking activity will likely slow somewhat because fewer room blocks are available, longer-term activity continues to be strong as overall bookings in the third quarter were up nearly 9% compared to the prior year. Even with the disruptive timing of several holidays and the election, group revenues on the books are up 7.5% for the fourth quarter....Overall, as we look at the quarter, we are still expecting group to be certainly up meaningfully in the fourth quarter. We do not expect group to be as strong in Q4 as it was in Q3."
  • "Our activity for 2013 continues to show sequential improvement with revenues on the books now 8% ahead of the prior year. A great majority of this improvement is happening in our larger group hotels, which are benefiting as customers began to plan more proactively."
  • "We continue to expect that we will complete incremental sales in the $300 million to $400 million range....While we hope to complete these sales by the end of the year, it is likely that the closing of some of these transactions could spill over into early 2013."
  • "We are also expecting to create value from some underutilized tennis courts at the Newport Beach Marriott Hotel & Spa. We are under contract with a luxury homebuilder to sell 4.2 acres of excess land adjacent to the hotel, which has been approved for the development and sale of 79 luxury condominiums. The successful execution of these innovative uses of existing space or unused land is expected to create future value to Host of approximately $400 million to $500 million."
  • "While it's premature to offer any specific guidance relative to RevPAR or revenue growth for 2013, we do believe that the fundamentals for our business continue to be attractive. We expect to enter next year with an occupancy level higher than we had in 2007, the strong booking pace I referenced and supply at a near record low of 0.5% in our markets. We are very confident that our managers will have success in negotiating higher special corporate rates this fall. Additionally, international travel continues to grow at a high-single-digit rate, adding demands in our priority gateway markets. All of these factors should result in solid RevPAR growth in the coming year."
  • "We expect our Philadelphia hotels to underperform our portfolio in the fourth quarter due to a decline in group and transient demand as well as a renovation at the Philadelphia Airport Marriott."
  • "We expect our Boston hotels to have a good fourth quarter due to strength in group revenues and an expectation of continuing strong transient rates."
  • "We expect our San Francisco hotels to continue to perform very well in the fourth quarter, as strong group and transient demand will allow us to continue to drive rate."
  • "We expect our Miami and Fort Lauderdale hotels to have a good fourth quarter due to solid group bookings."
  • "We expect our Los Angeles hotels to have a great fourth quarter due to robust group and transient demand."
  • "We expect our Hawaiian hotels to have a good fourth quarter."
  • "Results were affected by renovations at three hotels, driving ADR growth in New York has been challenging this year and we expect that trend to continue in the fourth quarter."
  • "RevPAR increased 3.5%, driven by an increase in rate of nearly 3%, a slight improvement in occupancy. We expect our Chicago hotels to perform much better in the fourth quarter due to better group and transient demand."
  • "Both group and transient demand were weak as there was little activity on Capitol Hill and election-year activities were outside of D.C. Results in the quarter were hurt by the rooms renovation at the Hyatt Regency on Capitol Hill. We have a series of meeting space and rooms renovations scheduled for the fourth quarter and we expect D.C. to continue to underperform the portfolio. We expect 2013 to be a better year for D.C."
  • "We are anticipating lower growth in F&B revenue and profitability in the fourth quarter of this year due to an unfavorable comparison for 2011, where F&B revenue grew 6.8%, as well as the anticipated impact of the challenging holiday and election calendar."
  • "We expect unallocated cost to increase in line with inflation, particularly for sales and marketing where higher revenues will increase cost. We also expect utilities to decline in the quarter albeit at a much lower level of decline than we experienced in the third quarter."
  • [Property tax] "At this point, we expect the full year increase in the 6% area as we have been successful in reducing several current year assessments and challenging prior year assessments."
  • "As we look at 2013, I would say that, while we're certainly happy with the disposition pricing that we seem to be attracting on the assets that we're looking at selling, I also think that we feel fairly comfortable that this is going to be an extended cycle. And so I would expect that we would continue to be active in 2013. Whether we're a net acquirer or a net seller probably depends more on how attractive the actual acquisition opportunities that develop over the course of 2013. But I think by and large our intent is to continue to be active in the year. And if I were trying to plan it out perfectly, I'd probably say we'd probably be about neutral in 2013."
  • "We're fairly comfortable that our capital spending in 2013 will decline compared to the levels that we had in 2012 and it should be by a fairly significant amount."
  • "The CMBS market does seem to be strengthening and we hope that that proves to be a continuing trend because we would expect that that would be a source of financing. Not the only one, but a key source of financing for folks who are buying properties from us."

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Takeaway: We're still cautious on Las Vegas and see little near term growth.

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.




  • IN-LINE:  Property level EBITDA was a little better than expected, but that was driven by higher than normal hold in Las Vegas and offset somewhat by lower hold in Macau which was known by the Street and should've been factored into Consensus. 



  • LITTLE BETTER:  International casino play was strong in 4Q but MGM was encouraged by the 6% increase in non-bacarrat play that they saw in the 4Q, which implies improvement in the domestic player base. Convention business was flat YoY and midweek continued to be a challenge at their "core" properties. Leisure/weekend business was a little better YoY. 
  • PREVIOUSLY: "You still have a fragile consumer out there and they're continuing to kind of pick their spots. We are seeing, particularly in the third quarter, we saw more reliance on leisure customers, which is a lower spend overall type of customer that we needed to dip into a little heavier than we did last third quarter and that is a lower spending customer. Going forward, we think we'll see an increase in international travelers."


  • SAME: Mass and slot volumes continued to outpace growth in VIP during the 4Q, which helped margins. 
  • PREVIOUSLY: "The mass market continues to grow strongly. We are confident there. VIP market is consistent, but it certainly slowed up and what we're looking at is probably numbers of growth going forward more consistent with the GDP growth of China rather than some of these accelerated growth rates that we've seen over the last two or three years.... We're looking at moderating the growth rates around that 8% to 10% while that the mass market we would expect to grow somewhat faster than that."


  • SAME:  MGM has received its general building permit and are planning on breaking ground on Feb 27. MGM remains on track for an early to mid 2016 opening, but the budget did increase due partly to increases in project scope to allow for future GSA expansion
  • PREVIOUSLY: Cotai project gazetted on January 9.



  • WORSE:  4Q corporate expense came in at $87MM, $34MM of which was associated with MD/MA development efforts.
  • PREVIOUSLY: "We do expect our corporate expense to be higher here in the fourth quarter driven by the referendum expenses we're incurring and that'll be up in the fourth quarter in a range in kind of the mid $60 million level for corporate expense before our stock comp expense."


  • BETTER:  4Q stock compensation, D&A, and interest expense came in at $8MM, $227MM, and $280MM, respectively.
  • PREVIOUSLY: "We expect our stock compensation in the fourth quarter to be approximately $10 million to $11 million. Depreciation expense in the fourth quarter is estimated to be about $230 million to $235 million. Our interest expense in the third quarter was $276 million, including about $6 million from MGM China and about $17 million in non-cash amortization. And we estimate that our gross interest expense in the fourth quarter will be approximately $285 million."


  • SAME:  Zarkana's occupancy was 88% through year end and showroom revenues at Aria grew 38% YoY. The show's success also helped drive restaurant business and other spending at Aria.
  • PREVIOUSLY: "Viva ELVIS officially ends its run on August 31 and we're looking forward to the opening of Zarkana in November. The theater has been modified for the new show and the artists are completing their final rehearsals in anticipation of the opening November 9. We expect this new show will turn what was a loss to our business into significant profits, while also driving up ancillary business."


  • SAME:  4Q REVPAR came in at 1%.  1Q 2013 REVPAR is expected to be flat.  The rooms at MGM Grand and Bellagio have been fully remodeled.  MGM will begin the remodel of The Hotel this year.
  • PREVIOUSLY: "We will now have all of our rooms back at the MGM Grand and they're all online as that remodel program was completed in late September. We're still in the progress of remodeling the Bellagio Spa tower, which will be completed in mid-December, and we'll have more rooms in service in the fourth quarter. Despite having more rooms available, we are seeing a somewhat better rate environment, and expect that RevPAR in the fourth quarter will be flat to slightly up for the year. Of course, we are watching closely the impact of storm Sandy on these numbers, but we are optimistic with that forecast for the quarter."


  • SAME:   MGM kept the commentary general for overall company convention bookings, just saying that they were pacing ahead for 2013 and looked even better for 2014
  • PREVIOUSLY: "Looking out into 2013, we're very encouraged to see that convention bookings, our pace is up over 10% year-over-year with rate up. Although it's early, 2014 pace is even stronger.


Takeaway: We're still cautious on Las Vegas in 2013

In line quarter with low than normal hold in Macau (known) and higher than normal hold in Las Vegas (wasn't known).


"2012 was a transformational year for MGM...highlighted by major improvements in our financial position, significant progress on future growth opportunities and strengthening of our company culture.  We closed the year with strong fourth quarter results driven by a 5% increase in wholly owned domestic resorts EBITDA.  We are off to a great start in 2013, with our Cotai land recently gazetted, a $500 million special dividend announced by MGM China, and solid events thus far in Las Vegas including Super Bowl and Chinese New Year."


- Jim Murren, MGM Resorts International Chairman and CEO



  • Board meeting next week at MGM China where they will discuss putting together a formal dividend policy
  • Made some tweaks to CityCenter that are going a long way to improve results
  • Goal is to improve employee morale which will result in higher customer satisfaction
  • Maryland: in the ERP process for the 6th license in MD. Have a May deadline to submit their proposal and believe that they will succeed in winning the award - should be awarded by year-end.
  • Confident that their proposal will prevail in MA
  • Partnership with Cadallac Fairview in Ontario - which is the premier developer in Canada- subsidiary of their Canadian Teacher's fund. 
  • Seeing encouraging signs in their domestic play.  Non-baccarrat drop grew 6% in the quarter.
  • Increase in occupied room nights was due to completion of MGM Grand renovations
  • Convention mix was flat YoY in 2012 at 15%
  • 1Q Strip trends similar to 4Q - flat RevPAR
  • $230MM of savings on cash interest expense due to refinance
  • Guidance:
    • Corporate expense of $40-45MM/Q
    • Stock comp expense of $9MM in 1Q
    • D&A: consistent with 4Q in 1Q
  • Interest expense: Gross interest expense : 225MM (8MM from MGM china and 8MM in amortization expense)
  • City Center:
    • Seeing results from changes in Aria - Zarkana opened - and sales are at 88% of availability- which is helping drive F&B
    • Slot handle increased 11%; table drop increased 5%; hotel revenues grew 3%
    • Strength from international visitors
    • So far, the remodeled buffet is well-received. 
    • Opening new pizza concept in the summer
    • Convention sales are pacing well, with sales 14% ahead of this time last year
    • Vdara occupancy grew to the low 80s
  • MGM China: 
    • Seeing early signs of success from their level 2 VIP expansion opened in September
    • Adding another junket operator
    • Main floor table gaming business had their best quarter to date
    • 60% of their EBITDA comes from non-VIP sources, which is also helping their margins at the property
    • Feb 27th is their scheduled ground breaking for Cotai
    • Construction budget of $2.6BN excluding land and capitalized interest.  Includes expanded foundation work. 80% of GSA allocated to non-gaming amenties.
  • Off to a very solid start in 2013.  What is very solid, is it = to good? Already had new events which set a positive tone for the year.  CNY was strong for them. Believe that the international business is off to a great start. Light Group is opening 3 new restuarant/bars in the Spring and a daytime pool. Mayweather is signed on for as many as 6 fights. The Hotel will be rebranded to a Delano and undergo a full room renovation.  Luxor should benefit from improvements at the Mandalay.


  • Margins in 4Q were better than expected in LV. How much of that was due the impact of renovations earlier in the year? Margins and traffic were impacted by rooms being offline at MGM Grand in 2012.  Streamlined FTE's and doing a better job attracting better guests which spent more at their resorts.
  • Expect to show better profit than revenue growth in 2013
  • Thoughts on CNY in Macau early results? 
    • Trend that they have been seeing over the last 4 years
    • Seeing a lot more families during the holiday season
    • As that traffic departs, they see a stronger return of gambler play
    • Seeing a lot less volatility around holidays
    • Main gaming play is very strong
  • Seeing a continued trend of strength in non-baccarrat play in 1Q.  They are seeing a pick up in their domestic customers recently. Business is good around events. Weekends are still strong. Mid-week is still a little choppy. But things are headed in the right direction. M LIFE investments are helping their mid-week business. ASCA deal is also helping their traffic.
  • Their promotional expenses are down and they are getting better at target marketing to their customers. 
  • Convention block looks up for 2013 vs 2012...they are pacing higher as a company and 2014 is looking even stronger. They will have more room nights at the MGM Grand in 2013 so that helps too. They are also assuming higher rates.
  • Have no interest in acquiring assets regionally or otherwise. Have a great interest in deleveraging though. Think that that there will be industry M&A but they will not participate. They are interested in MA where they aleady have a lot of customers in their database.  The one at National Harbor right next to the nation's capital is an even better international opportunity for them.
  • They are reapplying in AC because they believe in that property.
  • Their Cotai development is their #1 priority
  • Maryland and Mass will not open until 2016/2017 - so that gives them plenty of time to get their balance sheet in order
  • Cotai budget is up a little bit due to the tenders they received and some scope changes, intentions to apply to increase their GSA in the future
  • Vegas - mid-week group segment competition:  It has gotten more competitive especially with other cities that they compete with. It's really the lower end and Core properties that they struggle and 2013 will be a bit of a challenge. Miami and Chicago are more aggressive then they used to be with competing for citywide business.
  • City Center JV update with Dubai World:
    • They are looking at ways to monetize portions of City Center... looking at Crystals. It was always designed to be sold. That is a high target opportunity for them. They are not in negotiations to sell it yet but that is something that they will look at down the road.
    • Their relationship with their partner have never been better
    • Looking forward to refinance their debt there which has a 9% coupon
  • Segmentation of the Macau customer base and how that works, how much more upside remains?
    • Driven from premium down. Physically segmented their property to make sure each segment of their casino has the right product for the targeted customer.
  • Strip high-end does did better than the rest of their portfolio? Why is that?
    • Without the solid Citywide conventions, their lower end properties are harder to fill
    • They don't believe that their lower end customers are suffering more economically - in fact they are spending more than they used to in some cases. It's more of a supply demand issue and being able to get the right customers in there.
  • Smoking ban impact in Macau & work in Macau
    • Supporting the premium product - want to expand premium slot products - into the supreme private high limit product
    • Will upgrade platinum lounge
    • Too early to make a judgement on the impact of the smoking ban. There is clearly some impact on play patterns in their Mass floor.
  • Expect that they would get strong returns - at least high teens from investments in MA & MD. In the case of Toronto, it's still unclear on what the opportunity will be.  MGM Detriot is a good guide for what they expect.
  • Too premature for FY guidance but they like how things are shaping out for Vegas
  • The opening of Hakkasan will have a material adverse impact that will drive traffic and currently they have construction disruption at that end of the Strip
  • City Center cash - what is the plan there? Cash from condo sales. They intend to reduce leverage and improve cash flow there. At some point in the future they will look to pull money out of that venture. They are still owed about $100MM of cash proceeds from condos but those proceeds can't be dispersed until the Perini dispute is resolved.



  • Adjusted Property EBITDA of $505MM and wholly owned property EBITDA of $334MM
  • Wholly owned domestic resort highlights:
    • Consolidated casino revenue increased 1% YoY
      • Overall table games hold percentage was 21.9% compared to 22.8% last year
      • Slots revenue increased 2%
    • Rooms revenue at wholly owned domestic resorts increased 2% with a 1% increase in RevPAR at the MGM's Strip resorts to $112
      • Strip Occupancy was 87%, up 1% YoY
      • ADR increased $1 to $130
  • MGM China Adjusted EBITDA of $176MM and net revenue of $731MM
    • YoY revenue increase was driven "by increases in volume for main floor table games and slots of 13% and 37%, respectively. VIP table games turnover increased 6%... while hold percentage was 2.9%... compared to 3.2% in the prior year quarter"
    • Cotai development: "We look forward to our groundbreaking ceremony next week. We remain on track for an early to mid 2016 opening of what will be our most stunning resort and casino yet"
    • February 20, 2013, MGM China's Board of Directors announced a special dividend of $500MM, which will be paid to shareholders of record as of March 11, 2013 and distributed on or about March 18, 2013.  MGM will receive $255MM, representing its 51% share of the dividend.
  • City Center Adjusted EBITDA of $68MM and net revenue of $272MM
    • Aria's table hold was 23.9% vs. 27.2% last year
    • Aria's occupancy percentage was 86% and its ADR was $202, resulting in REVPAR of $173, a 2% increase compared to the prior year quarter
    • In December 2012, CityCenter closed on a sale of 427 of the remaining 438 units at Veer for $119 million in proceeds
  • Corporate expense increased to $87MM, primarily as a result of approximately $34MM of costs associated with development efforts in Maryland and Massachusetts
  • "We achieved several financial milestones in 2012, culminating with the refinancing transactions in December which allowed us to lower interest expense by over $200 million annually. We remain focused on reducing debt while continuing to maximize our free cash flow and have set a foundation for the execution of growth and development initiatives at our existing resorts and in new markets."
  • Cash: $1.5BN ($952MM at MGM China)
  • Debt: $13.6NBN ($2.8BN on Sr credit facility & $554MM under the MGM China credit facility). 
    • "At December 31, 2012, the Company's senior credit facility consisted of approximately $1.05 billion in term A loans, $1.75 billion in term B loans, and $1.2 billion of revolving loan commitments"
    • "At December 31, 2012, the interest rate on the term A loans was 3.3% and the interest rate on the term B loans was 4.25%."
  • Impairments & one time charges in the quarter included:
    • $65MM impairment charge related to MGM's investment in Borgata;
    • $366MM impairment charge related to land holdings on the north end of the Las Vegas Strip;
    • $167MM impairment charge related to land holdings in Atlantic City;
    • $47MM write-off related to the MGM's holding of South Jersey Transportation Authority ("SJTA") road development special revenue bonds;
    • Loss of $505MM related to the December refinancing transactions;
    • $372MM related to the change in valuation allowance for U.S. deferred tax assets

BBY: COF Credit Sale Hardly Bolsters Confidence In BBY

Takeaway: The early termination and sale of BBY's credit card portfolio at such a fire-sale price hardly bolsters confidence in its long-term outlook.

Here’s something that seemingly flew under radar screens, but Capital One Financial (COF) sold its Best Buy credit card portfolio to Citi yesterday. That’s not unusual, as similar credit transactions happen all the time. But what is very unusual is that the agreement was terminated early and the portfolio sold at book value – usually early terminations come along with a premium for the assets. That wasn’t the case here. This one happened at what our Financials Analyst Josh Steiner called a ‘get out of Dodge’ price. The company chalked it up to ‘strategic differences’, but our sense is that it simply does not want to be linked to a company that faces such severe secular headwinds like BBY.   


This is something to keep in mind -- particularly in light of two sell side upgrades over the past 24-hours. 

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