Takeaway: Sorry folks but Vegas is not in recovery. MGM numbers at risk

This note was originally published March 08, 2013 at 10:25 in Gaming


January LV Strip gaming revenues fell 19%, worse than our projection of -8-12%.  If we adjust table and slot hold to historical norm this and last January, gaming revenues fell 20%.  Baccarat was a major contributor of the decline as volumes fell 49%. More troubling was that slot volumes fell 2.4%, reversing two straight months of YoY growth.  We believe February slot volumes will also decline.  Not exactly the start to the year the bulls were expecting.


Strip Details:

  • Slot handle fell 2.4% (+1% on a rolling 3-month average).  
  • Slot win was flat as hold was 8.9% compared with 8.7% in January 2012 - both well above average
  • Table volume excluding baccarat dropped 5% YoY (+3% on a rolling 3-month average).  Table hold excluding baccarat was 11.6%, compared with 12.0% on a trailing twelve month average.
    • Baccarat volume tumbled 49% (compared with +163% growth in January 2012)
    • Baccarat win dropped 51% on hold of 12.0% (TTM: 11.9%, 12.5% in January 2012)

China and MKC

Last night, YUM reported Q1 (February) China comps of down 20%, with improvement in February versus the overall quarter.  The stock is getting a well-deserved bounce today, and we mention it only because one of the names in our staples coverage has some leverage to restaurants in China - MKC.  The big difference between YUM and MKC is that MKC has been bouncing hard for about a month now, on no news and with utter disregard for the direction of earnings estimates or the company's multiple.


MKC’s commentary relative to continued Q1 weakness (1/24):


“While the Asia Pacific region had a strong sales result for the Consumer business, demand from industrial customers, primarily quick service restaurants, was weak. This was largely an outcome of less new product and promotional activity versus the year-ago period. We expect this decline to extend into the first quarter of 2013, which has a tough year-ago comparison. If you recall, we grew base business industrial sales in the Asia Pacific region 22% in local currency in the first quarter of 2012.”

We get it – shorting mid-cap staples names is tough – the companies tend to have sticky shareholder bases, multiples tend to be elevated versus the large cap peer group (and seem to matter less) and the opportunity exists for relatively small deals to move the needle on EPS pretty dramatically.  However, it isn't often that you see such a dramatic divergence between the direction of EPS estimates and the direction of the multiple in a non-cyclical name.  Full-year 2013 consensus estimates have gone from $3.36 to $3.22 since the company reported back in January, and the multiple has expanded from 18.9x (immediately post EPS) to 21.7x.


China and MKC - MKC PE1


Perhaps you can make the case the company sandbagged 2013 EPS guidance, but even an earnings base closer to $3.50 puts this name at 20.0x '13, and we are having a difficult time coming to either that earnings base or that multiple.  It is our strong preference to deal in what is likely, and we think a more likely scenario is an EPS result for the full-year at or below current consensus.


Valuation is never a catalyst, but the combination of significant multiple expansion in the face of a declining EPS base confounds us, and we don't like being confounded.  MKC is fast moving up our list of names whose current price we can't justify or explain, but are inclined to short.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

PODCAST: What Keeps Keith Awake at Night?

Keith answers questions from clients from this morning’s investment call. 


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DKS: Value Trap -- Even After Getting Lanced

Takeaway: DKS is entering a period where margins will tread water while asset turns back-peddle. That's not a recipe for the stock to go up.

This note was originally published March 11, 2013 at 15:40 in Retail


A few people have asked us today as to whether we think that the DKS stock price reaction is overblown. If anything, we think it’s underblown (if that’s not a real word, now it is).


This has nothing to do with missing the flow of cold weather patterns or getting ‘Lanced’ by its stagnant inventory of Livestrong treadmills. But rather, it is a company in a mediocre business that is running at peak margins at a time when the outlook for comps (low single digits) is below the rate needed to leverage occupancy, deferred investments on the P&L are eating up an incremental 5% of earnings this year, and capex is trending up an incremental 20%.


Furthermore, let’s not forget that DKS falls into the bucket of names that has high risk of share loss to competitors and brands’ direct growth initiatives, and at the same time we see the company openly admit that it has underinvested in the infrastructure needed to take its ecommerce platform to the next level.


We get the whole point about DKS being a ‘best in breed’ retailer. But this is not necessarily a breed that needs to be owned.


We think that the crux of where DKS is in its cycle can be summed up in the Profitability Roadmap below, which shows the progression of margins vs. asset turns. Retailers, as we all know, can improve either one of those at any given point in time, but it’s when they improve simultaneously that real value is created and the stocks outperform materially (0.92 performance correlation). This is exactly what DKS did from 2009 through 2011, and it accounted for a 4-bagger in the stock.


But today, we think that we’re stuck at a point where margins will tread water, and it will be on an incrementally larger operating asset base. That is the ultimate recipe for a value trap.  


DKS: Value Trap -- Even After Getting Lanced - dksprrdmp

Beautiful Rage

Client Talking Points

Watch the Dollar

There are a lot of folks out there who simply hate this market, but the reality is that if you are raging against this market, you’re missing one of the most impressive four-month changes in Asian and US growth prospects that we’ve seen in nearly a decade. A strong currency, if sustained, is a pro-growth signal. So the key here is to watch whether or not the dollar remains strong.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“The question is (in my prime) who looked better in cutoff jean shorts – me or @KimKardashian?” -- @KeithMcCullough


“…fraught with arbitrary and capricious consequences.” – Manhattan Supreme Court Justice Milton Tingling on striking down New York city’s soda ban


$6 million, the salary the Baltimore Ravens wouldn’t pay receiver Anquan Boldin, who they traded to San Francisco


Takeaway: McDonald’s same store sales growth slowed last month. Will this trend last?

This note was originally published March 11, 2013 at 12:08 in Restaurants


MCD reported February global same-restaurant sales growth of -1.5% versus consensus of -1.6% (not adjusting for the calendar shift).  While calendar shifts are material for monthly headline numbers, the trend in McDonald’s comparable sales growth is unmistakably negative.  In five of the last eight months, McDonald’s has reported flat or down same-restaurants sales growth.  This is the longest sustained slowdown in sales trends since the company’s historic “plan-to-win” turnaround. 

This begs the question: can McDonald’s maintain its long term system-wide sales and operating income growth targets of 3-5% and 6-7%, respectively?


We remain skeptical that this slowdown is macro-driven; it seems evident that there are company-specific issues that are yet to be addressed by management.   Below, we update our thoughts on the various geographies.





There is nothing in the currents sales trends or in management communicated turnaround strategies that would cause us to reverse our negative stance on MCD.  We still believe MCD will see flat-to-low single digit EPS growth in 2013.  The emphasis on value has boosted MCD SRS growth in recent months, but history has shown that this strategy is not effective over the long term.  In fact, it externalities of this approach can impede sustainable earnings growth over time as operational complexity increases. 


The macro environment is challenging for a number of companies but the changes in McDonald’s long-term trends suggest that there are company-specific issues at play.  The current guidance for food inflation suggests that 2013 will not be as big an issue for MCD as in 2012, but the risk of upward revisions remains high.  Operating margins around the world are likely to continue to be pressured by sales deleveraging and incremental development costs.   


Our macro team retains its bullish view on the USD which would be a headwind for MCD Earnings, given its FX exposure.





February comparable sales growth for the domestic market was -3.3%, or flat excluding the segment’s calendar shift, versus consensus of -3.6%.  Sales were better than expected despite choppiness in consumer spending trends.   February represented the most difficult comparison for MCD in the U.S.



  • Fish McBites were introduced
  • Heavy focus on the Dollar Menu continued
  • Several lower-performing items were dropped from the menu, including the Fruit  & Walnut Salad and Chicken Selects.  We expect McDonald’s to drop the Angus Burger in the near future
  • Monthly SRS have held up on the back of incremental value message promotion, but this is not a sustainable trend
  • Extended hours are not driving incremental sales
  • The $6-7 casual dining lunch price point of $6-7 is competitive with MCD core menu items at lunch



MCD Europe

Europe comparable sales growth came in at -0.5%, or +2.7% excluding the calendar shift, versus -0.4% consensus. 



  • Russia and the UK continue to generate positive same-restaurant sales on the back of extended day parts and it appears that the horsemeat scandal may not have significantly impacted UK trends
  • German and France continue to experience declining sales and traffic trends, despite continuing messaging around value platforms
  • Margins in Europe are under pressure and will likely Margins in Europe are under pressure and will likely continue to contract in FY13 as sales growth remains under pressure in the region
  • The boost from reimaging is likely to diminish over time as almost all of the interiors and half of exteriors in the region have been completed





Asia/Pacific, Middle East and Africa (APMEA) February comparable sales growth decreased -1.6%, or +1.5% including the segment’s calendar shift, versus consensus of  -1.5%.



  • Australia continues to deliver positive SRS growth, while China benefited from the timing of Chinese New Year
  • Japan trends remain soft with February SRS trends of -12.1%
  • Average check at MCD Japan improved but traffic continued to decelerate, declining -10.9% year-over-year, versus the -8.1% decline in January.
  • Given the seemingly secular deceleration in Japan and the difficult environment in China, APMEA is also likely seeing continued margin pressure
  • What ideas, beyond value, are being put forward to improve the APMEA business?
  • Almost 2/3 of markets offer extended hours of some form and over half are open 24 hours.  This spigot is slowly closing from an incremental sales growth perspective.



Howard Penney

Managing Director



Rory Green

Senior Analyst