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UA: Exceeding Our Expectations

Takeaway: UA exceeded our expectations at its Analyst Meeting. We wouldn't chase it here. But to short it you need a rev miss. Increasingly unlikely.

Conclusion: UA exceeded our expectations at its Analyst meeting in Baltimore. We had UA on our Best Ideas list on the short side due to our concern that increasing capital costs to facilitate growth would erode margins in 2H. For reasons discussed below, we don't think we'll see that. We were wrong on the research here, and are not going to sit idle and hope it turns in our favor -- especially with a company where we believe so strongly that it will be a long-term share gainer. There are plenty of other lower-risk places we can look on the short side. UA officially off our list.  We're taking up our EPS estimates by a dime this year, and $0.20 in 2014 to $1.46 and $1.72, respectively, due to lower SG&A spend and slightly higher gross margins. We definitely would not chase the stock here at 40x earnings. Even though some of our best ideas are expensive (and deserve to be), this valuation is stratospheric. But to be short UA here, you need either a revenue miss, which we don't think we'll see, or a pick-up in opex, which now seems increasingly less likely.




Anyone who cares about the story likely heard the headline already -- that UA endorsed a $4+bn top line forecast in 2016 (revenue CAGR of about 22%).  By and large, that's consistent with what we're seen in recent years -- so no real shocker there.  But it's not really the revenue story that we doubted. After all, this is one of the few 'power brands' in retail that has blue sky revenue growth opportunities.


Our concerns have been two-fold. First and foremost, it was the cost of the growth. We believed that UA would have to take up its level of SG&A and Capital Spending to support growth in areas (footwear and international) that have higher barriers to entry, more competitive pressure, and are  inherently lower margin. Nike and Adidas, for example, have 90% of the global soccer/football market locked up, and they won't roll over and play dead in this space (a critical sport needed to reach every country except US).  In other words, we thought that UA would succeed in growing, but would go the way of other brands that came before it like Reebok, which had to take down margins from 11% to a high-single-digit rate in order to achieve its lofty growth goals.


Secondly, we were concerned about the revolving door of talent that started with changes in the supply chain organization two years ago through the departure of Footwear SVP Gene McCarthy in January of this year. Rarely have we seen so many executive departures without some kind of adverse consequences.   


But at the meeting yesterday, a few things became clear to us:

1)  Finally The Right Team? The team Kevin Plank has in place to take the company to the next level is probably the right one. We were most surprised by what we saw coming out of the footwear team. The irony is that we're finally seeing the beginning of a sustainable business AFTER McCarthy departed, which is ironic because he is one of the most talented executives in the space (at least that's our opinion). But for whatever reason, those skills did not translate well to UA. Don't get us wrong, some of the footwear product on the display wall was downright ugly -- most notably on the basketball wall (think of a dozen unmatched colors poured into a blender and then molded into a shoe). But then again, I (McGough) am hardly the authority on what product is 'cool' vs not. I'm probably a good contra-indicator. Personal preference aside, what I can make an authoritative statement on is that I was impressed by the company's focus on new platforms of product.


2) Why do platforms matter? Think way back to Nike versus Reebok. What makes Nike so successful is that it invests R&D dollars to come up with new platforms which become new lines of business. This dates back to Nike Air, but also includes Shox, Free, Lunar and FlyKnit.  In the Case of Reebok, they'd make a lot of noise about producing a new Iverson shoe -- which simply replaced the same shoe they sold at a different price point a year ago, but would rarely add new platforms. That's not a growth mentality. Under Armour is tearing a page out of Nike's playbook. It started with its Spine technology in Footwear, and is also doing it with the new Speed Form, which will be released en masse over the next 12 months. In apparel, we're seeing this with the Alter Ego line (think compression apparel meets superhero unitards). Sounds crazy, I know. But it was the best selling product in all of 1Q13 despite the fact that it only sold in March. We're seeing the same 'platform' development in apparel with things like Storm, InfraRed, ColdBlack, Scent Control, ArmourBra and a new men's underwear line. Products flop all the time, but platforms rarely fail in this business unless the R&D or the Marketing is severely botched.


We're doing further analysis on the specific areas of revenue growth potential for UA based on new information given at the analyst meeting (including international, retail and a deeper dive in footwear), and will return with more depth thereafter.

I Snapped

This note was originally published at 8am on May 23, 2013 for Hedgeye subscribers.

“Hi there. Sorry if I took a snap at you at one time. Fish gotta swim, birds gotta eat.”

-Finding Nemo


I’ve watched that movie at least 30 times (I have a 3 and a 5 year old). And while I haven’t seen this market movie before, I have seen how the waters tend to flow toward a burst of entropy, over the dam.


I’ll get to the flows of how this macro trade snapped in a minute, but first wanted to give credit to where it’s due. Ben Bernanke was fantastic yesterday – in terms of storytelling, that is. He was so convincing that the market finally realized it’s fiction.


Markets (particularly the bond market) losing faith that Bernanke can find Nemo, is not a good thing. Even the Gold market realized that his entire policy depends on fictional forecasts at this point. That’s saying something.


Back to the Global Macro Grind


Follow the flow of the last 6 months:

  1. Bernanke teaches the Japanese how to eviscerate their currency for short-term political gain
  2. The Japanese take it up 20,000 feet and roll with 132 TRILLION Yens of easing
  3. Yen gets blasted to 103 and the Weimar Nikkei rips a +75%, 6 month, move
  4. The 57% (average Japanese Household net worth has that much in JGBs and Cash) says, buy Weimar Nikkei!
  5. To buy Weimar Nikkei, Japanese dudes have to sell JGBs
  6. JGBs breakout above the Hedgeye TAIL risk line of 0.81% (on the 10yr)
  7. Implied volatility in JGBs starts to rip (Japanese breakevens are already ripping too)
  8. Japanese Government guys say we got this move in the bond market under control, right?
  9. USA’s Central Planning overlord (Bernanke) says I got it on this end too, right?
  10. US stocks, bonds, and Gold all snap intraday; Yen stops going down; Nikkei closes down -7.3%

I sold all but 7 LONG positions and took our Cash position to 50% in the Hedgeye Asset Allocation Model at 10:38AM EST right after Bernanke spewed something about “savers wear multiple hats.”


It was only the 2nd day since November 29th that I was net short intraday in Real-Time Alerts. Sorry if I was snapping on him on Twitter in real-time. I gotta speak my mind, kids gotta eat.


Not only was Bernanke’s thing about savers a slap in the face to any upstanding American who has taught their children Benjamin Franklin style frugality, but it showed a genuine lack of respect for the sacrifice savers (deposits) have made to backstop the most asymmetric, levered, and tax payer funded, trade in US history.


Sorry Ben. You lost my trust and respect a long time ago. Now you are losing the market’s. So now what? After consensus hedge funds bought SPY call options at their most aggressive pace since 2007 (on Tuesday, ostensibly having some inside info on what Bernanke was going to say about tapering), is it officially time to freak out?


Well, since Rule #1 is don’t lose money and rule #2 is probably turning into don’t freak out when other people are – we should probably respect the all encompassing rules of market mortality as well (I learned this one from Nemo too):


Marlin: Now it's my turn. I'm thinking of something dark and mysterious. It's a fish we don't know. If we ask it directions, it could ingest us and spit out our bones. 

Dory: What is it with men and asking for directions? 


Marlin: I don't want to play the gender card right now. You want to play a card, let's play the "let's not die" card. 


Ok. So that about sums up my call this morning – we’ve had a great run; let’s not die.


We’ve already snapped some lines where price momentum chasing machines will end up dead via stop loss this morning. What was immediate-term TRADE support is now resistance for the DAX, Nikkei, and SP500 at:

  1. DAX = 8,389
  2. Nikkei = 15,097
  3. SP500 = 1657

The good news is that bullish TREND supports for all 3 remain firmly intact (for the SP500 that’s 1558). The bad news is that those TREND lines of support are a lot lower than last price.


In my last few weeks of rants (notes titled “Sovereign Yield Risk” and “The Waterfall”) I’ve outlined how all of this could potentially play out. My general advice for 6 months has been don’t buy bubbles that are popping (Gold, Commodities, etc.).


Bernanke is big on asset bubbles (Housing, Commodities, and now Treasuries). And the Japanese are big on Bernanke. So the last thing you want to be buying this morning are more of the Japanese (JGBs) or Bernanke (Treasuries).


If you are hungry for Yield – I guess that’s too bad. We’ve had plenty to eat – and eating the artificial stuff won’t fill your family’s belly forever; your hard earned Savings will.


And, as for you Mr. Bernanke… Marlin, Mr. Market, and I are going to start teaching you how to eat that Yield Chasing thing like Dory was taught, “Cause you are about to eat my bubbles.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, Weimar Nikkei, and the SP500 are now $1339-1398, $100.97, $83.84-84.69, 100.11-103.39, 1.86-2.03%, 12.94-15.73, 964-988, 14269-15097, and 1620-1657, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


I Snapped - Chart of the Day


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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Wandering Trends

“One main factor in the upward trend of animal life has been the power of wandering.”

-Alfred North Whitehead


Rather than get all googly eyed about modern day central planners who are long of social science dogma and short of math, I tend to wander backwards when looking for direction. History is my contextual guide, and so are her credible sources.


Whitehead was one of the British math guys (1) who wandered outside of academia’s box. He co-authored Principia Mathematica with one of the world’s premier strategists (Bertrand Russell) and was an early adopter of what we now call Chaos Theory.


From considering the metaphysical global macro market to the process you have developed to absorb it, what is that you do when markets go against you? What do we do when immediate-term TRADEs wander from the intermediate-term TRENDs? Bull or bear? Personally, I am ok with being called an animal.


Back to the Global Macro Grind


I had a very bad day yesterday. Yes, for those of us who timestamp every move we make, they do happen. But what, precisely, was happening? Was my first move to do more of what wasn’t working? Or was it a better decision to wait and watch?


The good news about today is that Mr Market gives us direct feedback on however we answered those questions. Right or wrong, we are tasked with always questioning the behavioral side of our decision making process. #evolve


To put yesterday’s -1.38% drop (SP500) in context, it was the 5th worst day for US stocks in 2013:

  1. February 28, 2013 = -1.83%
  2. April 15, 2013 = -2.30%
  3. April 17, 2013 = -1.43%
  4. May 31, 2013 = -1.43% 

When I was a younger man trading on simple moving averages and voodoo technical charting systems that my bosses would push down on me, one-factor price moves could really throw me for an emotional loop.


Now I use a baseline 3-factor model that includes PRICE/VOLUME/VOLATILITY parameters and predictive tracking algorithms. And it’s that last little critter (VOLATILITY) that helps me sometimes front-run the proactively predictable behavior of machines.


What all 5 of the worst US stock market down days have in common is front-month US Equity volatility (VIX) seeing a very short-term capitulation to lower TREND duration highs. Here’s that history of VIX closing prices:

  1. February 25, 2013 = 18.99
  2. April 15, 2013 = 17.27
  3. April 18, 2013 = 17.56
  4. May 31, 2013 = 16.30

And yesterday, the VIX closed +7.6% on the day at 17.50.


So, what say you Mr Mucker, TRADE or TREND? That’s easy:

  1. SP500 = bearish TRADE; bullish TREND
  2. VIX = bullish TRADE; bearish TREND 

For those of you who are new to reading my rants, in our model TRADEs are 3 weeks or less and TRENDs are 3 months or more. I built the model this way so that I don’t let my emotions allow me to wander too far away from fundamental research trends.


Freaking out and selling at every higher-low within a bullish TREND is called losing money. And since that would violate Rule #1 in our risk management process, we don’t want to be like that.


Why is the intermediate-term TREND for US stocks bullish and for fear bearish? I think the fundamental research answer to this quantitatively prefaced question is crystal clear – what everyone lives in fear of (#GrowthSlowing) is now #GrowthAccelerating.


Darius Dale will show you this in our Chart of The Day (6 month TREND duration charts)

  1. US Equity Volatility is still crashing (-23% from its Johnny Boehner sequestration fear-mongering high in December 2012)
  2. US Equities (SPY) continue to make a series of higher-lows on selloffs as the VIX makes lower-highs

If the VIX can’t close above 18.99 and the SP500 can’t snap my TREND support line of 1577, what I’ll be doing from here is doing more of what we have been doing for the past 6 months (buying the damn dips in US Consumption and shorting almost everything Commodities).


No, that doesn’t mean I bought all the way down yesterday. It actually meant I did a whole lot of nothing. The SP500’s TRADE line broke, so why hurry when I can either buy lower or buy on another TRADE breakout above 1624 SPX when my convictions are confirmed?


Of all the bubbles Bernanke has helped perpetuate, one of the biggest is fear. The fear of change (rates rising) in this market is pervasive. But don’t wander too far from the TREND here my friends. Shorting fear and buying growth has been right; stay with it until the mathematical signals collide with the fundamentals. If they change, we will.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $100.24-104.42, $82.21-83.32, 98.71-103.02, 2.01-2.23%, 15.31-17.91, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Wandering Trends - Chart of the Day

Wandering Trends - Virtual Portfolio






The EuroVegas resort project in Alcorcón, on the outskirts of Madrid could get the go ahead from the Spanish government in “a couple of months.”  The assurance was made by the prime minister of Spain to Adelson and Leven last week, when they made a stopover in Madrid on the way to Tel-Aviv and Macau.


“We met with the prime minister Mariano Rajoy, the president of Madrid and other officials," Mike Leven told the Times, adding that “we went through the four or five remaining outstanding situations of the deal, and they’ve assured us they are going to get back to us sometime in the next couple of months. And I must say, and Sheldon said this in Israel, the Spanish government is trying very hard [to move ahead with the project].”


The investment in the first phase amounts to USD10 billion, an amount which worries both investors and analysts who have shown their fears with the risk the European LVS mega-bet may pose to the company.  To this, Leven responded: “Adelson’s not going to bet the company and he’s not going to risk the company without having the kinds of concessions that reduce the risk of the financial investment.”

EuroVegas resort project in Madrid would emphasize amenities aimed at the meetings and conventions sector, including a total of 2,400 meeting rooms and 12 hotels with about 3,000 rooms each. 




The details behind the May numbers



As you know, May GGR grew 13.5% YoY to HK$28.7 billion.  We estimate that including direct play, VIP hold was 2.91% versus a normalized 3.00%.  Had VIP hold been normal this May, YoY growth in GGR would’ve grown 16.5%.  With normal VIP hold in both periods, GGR growth would have been 13.9% (similar to what was reported).  We expect June growth to be similar to May but July could spike close to 20%.





Total table revenue grew 14% YoY.  Mass market growth continued its streak of around 30% growth rate, growing 32% in May.  VIP volume and win rose 8%, in-line with April's growth. 



LVS took the top spot for table revenue growth at 43% for the 4th consecutive month.  The company had the highest mass revenue growth at 66%.  Its RC volume grew 23%.  We estimate that LVS held normal at 2.76% in May compared to 2.53% last May, assuming direct play of 15% vs. 23% last year.  Venetian and FS played lucky while SCC and Sands Macau held low.

  • Sands eked out a 1% gain YoY
    • Mass grew 32%, its best monthly YoY growth in a long-time
    • VIP fell 27% 
    • Sands held very low but also had an easier comp.  We estimate that Sands held at 1.8% compared to 2.3% in the same period last year.  We assume 11% direct play in May vs 9% in May 2012.
    • Junket RC fell 8%, its 3rd consecutive month of declines
  • Venetian grew 63% YoY, the property's best growth since January 2012
    • Mass increased 55%
    • VIP revenue skyrocketed 70% due to high hold
    • Junket VIP RC fell 5%, its 15th decline in the past 16 months
    • Assuming 27% direct play, hold was 3.5% compared to 2.0% in May 2012, assuming 28% direct play 
  • Four Seasons jumped 42% YoY
    • Mass revenues increased 24%
    • VIP grew 45%
    • Junket VIP RC jumped 32%. May hold (assuming 11% direct play) was 3.1% vs 2.7% in May 2012 when direct play was 16%.
  • Sands Cotai Central grew 46% YoY
    • Mass jumped 167% to $87MM, a new monthly high 
    • VIP revenues grew 8% to $110MM
    • Junket RC volume of $4.4BN, up 72% YoY 
    • If we assume that direct play was 11%, hold would have been 2.2% 


MPEL had a solid month, lobbing in the 2nd best table growth of 31%.  Mass grew 63% while VIP growth was 22%. We estimate that MPEL held at 2.70% vs 2.78% last May.  Estimated direct play was 10% vs. 10.5% last year.

  • Altira revenues grew 33%, the property's best growth rate in 20 months.  Mass rose 28% while VIP saw a 33% YoY increase.
    • VIP RC grew 25%
    • We estimate that hold was 2.8%, compared to 2.6% in the prior year
  • CoD table revenues grew 30% YoY
    • Mass increased 68%, continuing its impressive streak of strong YoY double-digit gains since the property opened
    • VIP win grew 16% and RC grew 28%
    • Assuming a 13.5% direct play level, hold was 2.7% in May compared to 2.9% last year (assuming 14.7% direct play)


Wynn table revenues grew 22%

  • VIP revenues grew 25%, while VIP RC increased 1% 
  • Wynn held at 3.1% vs 2.6% last May
  • Mass revenues increased 9%


MGM had a strong performance in May, growing 25% in table revenues. 

  • We estimate that hold was 3.1% adjusted for direct play of 7% vs hold of 3.2% last year assuming 9% direct play
  • VIP RC and Mass both grew 29% 


Tables revenues grew 8%. VIP RC had the worst market performance, falling 6%.  On the bright spot, Mass growth was very strong at 44%.  Hold was 3.2% in May 2013 vs. 3.0% last year.

  • StarWorld table revenues rose 20%
    • Mass soared 44%
    • VIP gained 17%.  
    • Junket RC rose 6%, breaking 11 straight months of declines 
    • Hold was 3.1% vs 2.8% last year
  • Galaxy Macau's table revenues was flat
    • Mass had another great month at 44% growth
    • VIP saw a second consecutive decline at -12% and RC also fell 12%.  
    • Hold was 3.2%, similar to May last year


SJM performed relatively poorly in May, partially due to hard comps and lower hold.  Total table revenue fell 12%, with the worst mass market share growth (none) and VIP revenue decline of 16%. RC volume dropped 2%.  SJM held at 2.8% vs 3.2% last year.






Market share lost 90bps to 20.9%.  May’s share is in-line with LVS’s 6-month average of 21.1% and better than its 2012 average share of 19.0%. 

  • Sands' share fell 20bps to 2.8%.  For comparison purposes, 2012 share was 3.9% and 6M trailing average share was 3.4%.
    • Mass share jumped 130bps to 5.9% in May
    • VIP rev share fell 80bps to 1.5%, a new all-time low
    • RC share was 2.2%, flat MoM and in-line with the all-time low for the property set in March
  • Venetian’s share was flat at 8.5%.  2012 share was 7.9% and 6 month trailing share was 8.3%.
    • Mass share decreased 1.5% to 14.4%
    • VIP share improved 50bps to 6.0%
    • Junket RC share gained 40bps to 3.9%
  • FS gained lost 20bps to 3.7%.  This compares to 2012 share of 3.7% and 6M trailing average share of 3.2%.
    • VIP was flat 4.7%
    • Mass share fell 20bps to 1.5%
    • Junket RC was flat at 4.1%
  • Sands Cotai Central's table market share fell 50bps to 5.5%, which compares to the 6M trailing average share of 5.8%.
    • Mass share improved 40bps to 8.2%.
    • VIP share fell 0.9% to 4.4%
    • Junket RC share was flat at 5.5%


MPEL lost 2.3% in share in May to 14%. Its 6 month trailing share is 14.0% and their 2012 share of 13.5%.  

  • Altira’s share fell 20bps to 3.8%, above its 6M and 12M trailing share of 3.9%
    • Mass share was flat at 1.3%
    • VIP lost 40bps to 4.8%
    • VIP RC share fell 40bps to 5.2%
  • CoD’s share lost 2.1% to 10.2%, but still above the property’s 2012 and 6M trailing share of 9.4% and 10.0%, respectively.
    • Mass market share grew 1.5% to 12.5%
    • VIP share tumbled 3.6% to 9.2%
    • Junket share ticked down 20bps to 9.3%


Wynn was the largest share gainer in May, gaining 260bps to 12%.  2012 average share was 11.9% and their 6M trailing average share has been 11.0%.

  • Mass share was fell 50bps to 7.3%
  • VIP share gained 4.1% to 13.9%
  • Junket RC share increased 80bps to 12.5%


MGM’s market share rose 2.5% to 11.4%, above its 6M and 2012 average of 9.6% and 9.9%, respectively

  • Mass share gained 40bps to 7.8%
  • VIP share improved 3.4% to 12.6%
  • Junket RC gained 1.0% to 11.8%


Galaxy's share gained 1.2% to 18.8%, below its 2012 average share of 19.0% but above its 6-month average of 17.9%

  • Galaxy Macau share improved 0.5% to 10.8%
    • Mass share gained 1.1% to 10.8%, an all-time property high
    • VIP share improved 30bps to 10.8%
    • RC share lost 10bps to 9.8%
  • Starworld share gained 2% to 7.8%
    • Mass share was lower by 40bps at 3.4%
    • VIP share jumped 3% to 9.6%
    • RC share gained 70bps to 9.5%


SJM was the largest share donor, losing 3% MoM to 22.9%, which is below their 2012 average of 26.7% and their 6M trailing average of 26.4%, and a new all-time low

  • Mass market share declined 70bps to 24.7%, an all-time company low
  • VIP share fell 4.3% to 22.8%
  • Junket RC share fell 2.2% to 25.6%


Slot Revenue


Slot revenue grew only 5% YoY to $152MM in May

  • Galaxy had the best YoY growth at 43% to $20MM
  • LVS grew of 9% YoY to $43MM
  • MPEL gained 5% YoY to $25MM
  • MGM fell 1% to $25MM
  • WYNN dropped 8% to $21MM
  • SJM had the worst YoY slot performance, losing 9% to $18MM


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