Demand for Las Vegas is indeed elastic.  Drastic room rate cuts have improved visitation sequentially.  The nightlife impact has been noticeable.  In fact, anecdotal evidence suggests that the clubs are actually booming right now.  Unfortunately, that is the only part of the business that is doing well, unless you count crowded buffets.


We know room rates are down.  Lower visitation and gaming spend per visitor have driven down gaming revenues.  Despite the higher club and buffet activity, restaurant covers appear to be way down.  The best explanation I've heard is from a client following his recent visit.  He speculated that younger adults are packing in 4 people to a room and spending what little cash they have on the necessities:  buffet food (optional), club cover charges, and booze.


The following chart shows the departmental profit margin at Las Vegas casino hotels.  The huge margin expansion experienced over the last 15 years has been driven exclusively by Food & Beverage and the Hotel, coinciding with the nationwide housing boom.  Hotel pricing has been under the most pressure and given the falling demand, F&B may very well be too.  We first introduced this chart way back on 06/22/08 with our post, "MEAN MARGIN MEAN REVERSION".  The argument back then was that the most discretionary segments (hotel and F&B) were most at risk and Las Vegas margins had peaked.


FRAT BOYS AND LAS VEGAS - LV departmental profit margins 


The key then and now is housing and the wealth effect.  Housing was already falling throughout most of 2008 and with a little statistical analysis we showed that rising housing prices were the number one macro driver of the gaming boom over the last 15 years.  Housing prices are still falling and I'm not sure the housing related wealth decline has reached its full impact on consumer spending.  The 4% national savings rate is high by the standards set during the housing boom, but very low relative to the high single digit rate averaged during the pre-1995 period.


Las Vegas was a prime beneficiary of the housing bubble both in terms of pricing and margins.  Anyone who has consistently visited the city over the last decade can attest to the price inflation.  I certainly can.  Hotel rates and F&B pricing used to be "loss leaders".  They may soon be again.

TIF: Lux stinks, but TIF may have bottomed financially

In looking at Tiffany's 1st quarter results there were no big surprises.  Sales, margins, and expenses were all largely in-line with expectations.  EPS was $0.20, a penny below the Street, but that really shouldn't matter at this point.  This is a quarter to tuck away and forget about.  Domestic same-store sales declined by 34%, a combination of a 42% decline in the NY flagship and a 32% decline for the remainder of the US.   Anyone paying attention to the luxury segment and other big-ticket discretionary categories should not be surprised by such large declines.   Instead, we're focusing on a few subtle changes on the margin that came out of the quarter.


  • 73% of TIF's EBIT comes from the US and Japan and we're encouraged to see an uptick in the sales trend in these markets. It's always risky to call an exact bottom, but this certainly looks like one to us.


  • With just under 50% of Tiffany's products containing a diamond of some sort, it is worth noting that diamond pricing has reversed dramatically in the past 6 months. We are now back to pricing levels of a couple of years ago. It will take some time for inventory turns to work through higher cost raw materials, but this reversal should help gross margins at the end of 2009 and throughout 2010.


  • The recent and severe weakening of the U.S dollar should help TIF in the near-term, beyond the Street expectations. Let's be clear - the Dollar crashing does not end well for any of us, and we are not expecting tourists to return to 5th Avenue in droves, but this trend should help mitigate the fairly large FX translation impact we saw in 1Q.


  • Consolidation has been a key theme of ours and the high-end jewelry market is a great example. With few national brands, if any that compare to Tiffany, there has been an increasing wave of store closures and bankruptcies. Inherent in the jewelry business is a high cost to fund inventory and only those with strong balance sheets will survive.


  • Lastly, TIF's triangulation of sales, margins and inventories are improving on the margin. Check out the SIGMA chart below. 1Q is sitting in the lower left quadrant, and it is unlikely it will remain there for more than 1 more quarter. ANY move out of that quadrant is a positive stock move.


By no means are we out of the woods on the challenges facing the luxury retailer and consumer.  In addition, we're not particular fans of the TIF business model (low margins and high inventory carrying costs). However, there is an increasing amount of certainty surrounding Tiffany.  In our view the brand remains iconic in stature, expenses are being managed wisely and investments in the future remain in place where appropriate (store growth will be up 5-6% in '09).   Importantly, management remains true to the brand and hasn't conformed to the environment.  Has anyone seen the case of clearance engagement rings? 


Eric Levine


TIF: Lux stinks, but TIF may have bottomed financially - TIF Comp Trends


TIF: Lux stinks, but TIF may have bottomed financially - TIF commodity prices


TIF: Lux stinks, but TIF may have bottomed financially - TIF SIGMA


Jack Lam, an accomplished junket operator, opened a VIP operation earlier this year at the Mandarin Oriental hotel in Macau under the Stanley Ho umbrella.  By all accounts, Mr. Lam has been successful.  We've heard he may have done almost $1 billion in VIP turnover in April alone.  We've also heard that he could be retaining a commission of 1.4%, well above the much discussed "cap" of 1.25% and certainly even more above the rate Wynn Macau is likely paying him for his VIP room at that property.


With those respective economics, it should be pretty clear where Lam's priorities are.  As can be seen in the following chart, Wynn Macau's market share began falling in February, and more rapidly in March and April.  Some of the market share loss in April can be attributed to lower hold percentage.  However, considering Lam's success at the Mandarin, most of Wynn's VIP market share loss is probably sustainable.  Every 1% of VIP market share represents approximately $80 million annually in revenues or and $15-17 million in EBITDA.


WYNN MACAU MARKET SHARE ON THE LAM - wynn macau market share 


On the Mass Market side, Wynn Macau's market share has fluctuated but the trend is pretty flat.  However, that will likely change for the worse as well.  City of Dreams opens on Monday with a high end Mass Market target market.  This segment is Wynn's power alley.  CoD is unabashedly going after the core Wynn customer.  Wynn is the better operator but with visa restrictions in place, at least for a few more months, the Mass Market is unlikely to grow enough to offset the 17% capacity addition.  Wynn could be the prime casualty.

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There have been a few upgrades in the sector recently based, in part, on optimism about business getting less bad.  This thesis has certainly played out in the gaming and cruise line sectors.  While the same thesis will eventually play out in lodging - even a broken clock is right twice a day - we are not seeing any evidence of sequential improvement.  Our 2010 estimates for HOT EBITDA and EPS remain 10% and 30%, respectively, below the Street.


YoY occupancy remains way down from last year.  As we opined in our 01/07/09 post, "FILL 'EM AND THEY (INVESTORS) WILL COME", improvement in occupancy is a strong signal that there is indeed light at the end of the tunnel, even if lower rates are still driving overall RevPAR down.  Lodging stocks typically do not sustain rallies until occupancy bottoms.  Unfortunately, there is no visibility on that pivot.


As can be seen from the chart below, lodging fundamentals are not improving.  We're not sure what data other sell-side analysts are looking at, but the STR data doesn't show any recovery or stabilization and our network of private hotel franchisees certainly doesn't see things getting any better.  Just because the YoY decrease in RevPAR isn't accelerating doesn't mean that we've reached the bottom or that there is any improvement in sight.   Occupancy fell 11% in April, and is tracking down 12.5% for the first 3 weeks of May.  Given the lack of demand for rooms, the only way to fill rooms is by stealing share from your neighbor by dropping price.  In order to change this you need real demand growth stimulated by job growth and income growth - things stabilizing at bad levels isn't enough.




We will give credit when credit is due. Starwood has done a great job cutting costs, but we do not believe that all of these cost cuts are sustainable, especially the ones at the capex level.  We wrote about this in our 5/2/09 note "YOU TUBING HOT".   Like the gamers, many hotel companies are simply deferring capital expenditures.  The deferred maintenance capex issue is why many of the recent asset sales have come with mandatory investment requirements.  We heard that the W New York - The Court & Tuscany is on the market for $100MM but the required capital improvements are almost as high as the ask price.  Cuts on timeshare are only sustainable until the inventory on hand is sold, and then companies need to start investing again - otherwise we need to look at these businesses on a liquidation basis, not a multiple basis.


We understand the reflation trade.  In fact, Research Edge was a big proponent of this thesis beginning in early March (thanks Keith), especially with the gaming and cruise lines sectors.  That trade has worked.  With cost of capital rising and valuations rising there needs to be more to keep this rally going.  How about the fundamentals?  Not quite yet.   



"Better than bad" is not "good"


METI Industrial Production data released today registered at 5.24% on a month-over-month basis, the largest increase on a M/M basis in 56 years and the second consecutive increase.  The news bolstered hopes that the worst in now over for Japan as marginally increasing exports and inventory depletion helped get the wheels turning again in several production categories.




Unfortunately the glass half full argument appears to us to be undermined by the data.  On a year-over-year basis total production for April still declined by a measure of over 31% with durable goods production declining over 41% -effectively taking absolute production back to levels last seen a generation ago.  Although on a sequential basis output of basic industrial products like fabricated and non-fabricated metals and plastics improved for the month, the continued decrease of output of transportation equipment, heavy machinery and other highly engineered products suggests that Korean factories -helped by a weakened Won, continue to place competitive pressure on Japanese rivals in the higher margin segments of heavy industry.


One of the bright spots to note for April was electronic products, which saw very significant improvement in output levels, with the rippling impact of increasing Chinese demand helping to drive production to a Y/Y decline of 37%, a 10% improvement over March levels and the smallest decline since November of last year. Passenger automotive also saw slight sequential improvement on marginal export recovery.  None of this was sufficient to stem rising job loss as official unemployment registered at 5%, the highest level since 2003 and within half a percent of the highest levels the nation has experienced since 1953.


We view today's data as mixed at best, with some marginal improvement but certainly no indication that a bottom has been found for the land of the rising sun. We fortuitously covered our EWJ short position yesterday, locking in a modest gain ahead of this news, but we continue to maintain a negative bias on the Japanese economy. Unlike the emerging Asian economies, which appear to be showing early signs of real recovery, and South Korea and Taiwan, who are being impacted more directly by "the Client"  and currency inflections, Japan still appears firmly stuck in a rut to us. The only positive catalyst that could sway our near term opinion on Japanese equities would be a weakening Yen.


Andrew Barber


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