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Wynn Resorts has submitted an application to list its Macau unit on the Hong Kong exchange, hoping to raise between US$500 million and US$1 billion.  Wynn’s plans come as LVS prepares an IPO of its own Macau division.  No decisions have been made regarding the timing or terms of any offering or whether the subsidiary will proceed with the transaction.



Macau International Airport’s passenger traffic was down 22% for 1H09, compared with the same period last year.  A statement from the Macau International Airport Company said that “there is the need to prepare for the after-crisis, and CAM has been proactively promoting the airport to airlines in target markets and developing strategic alliances with other airports”.  There is also a planned new service between Macau and South Korea due to start “after the summer”.



Macau’s composite consumer price index rose just 1.1% in June. It was the lowest year-over-year growth rate in five years, according to the Statistics and Census Service (DSEC).  The average consumer price index for the first half of this year grew 2.54% on the same period of last year.  The composite CPI is intended to reflect the impact of price changes on the general population. 



The government income from taxes decreased 10.3% y-o-y to MOP18.51 billion in the first six months of the year. Direct gaming taxes accounted 72.5% of the government’s total revenue in 1H09.  The Gaming Inspection and Coordination Bureau announced a 12.4% decrease y-o-y to MOP51.42 billion in 1H09.  The number of casino licenses – not necessarily all operational – held by Macau’s six gaming operators stood at a record 32 at the end of June.


The SBG system seems to be having some technological difficulties at CityCenter. We’re also not sure IGT will get its typical new casino market sure.


The casino at CityCenter is expected to open in December of this year.  Our sources indicate there are numerous technological difficulties associated with the Server Based Gaming (SBG) system.  Apparently, the system’s compatibility with non-IGT games has been inoperable.  We’ve also heard from other sources that SBG trials at tribal casinos have lacked functionality.  If so, what exactly would casinos be paying for?

CityCenter would be the most important test yet of SBG.  SBG has long been promised as the future of the slot machine business.  Serious operational issues could further delay widespread SBG implementation by years.  IGT needs to get the house in order quickly by fixing the problems and offerering some meaningful applications.

The second potential issue with CityCenter, as it relates to IGT, is slot market share.  Even as its overall market share has declined, IGT has maintained a 50-60% or so ship share into new casinos and expansions.  Unfortunately, IGT may struggle to obtain a 45% share at CityCenter.

We’ve been on the right side of IGT the last few months and still believe that we are about to embark on an extended slot bull market.  However, the near term looks to be pretty rocky.  IGT will report its fiscal Q3 on Thursday and we, like a lot of investors, think they could miss the Street consensus of $0.18.  Other than potential for new markets (Ohio, video poker in IL and PA, and more casinos in IA), there probably won’t be a lot of positive data points discussed on the conference call.  Given the lack of near-term visibility, we don’t expect strong earnings guidance from the company, either.

As we said in our 7/20 post, the right strategy might be to fade the optimism ahead of earnings. 


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UA: Comfortably Numb?

The data is pretty clear -- negative reports on near term trends at UA are indeed having less of an effect on UA shares (best measured as relative to the MVR index). The first chart represents the performance of UA shares relative to the MVR over the 2-day period after a negative research note. Tough to miss that relationship. As you can see from both the trendline as well as the higher lows, the market is increasingly shrugging off incremental bearishness.


Casey Flavin


UA: Comfortably Numb? - UA Market Reaction to NegReports 7 09


UA: Comfortably Numb? - UA Reaction to SS

SBUX - Onward and Upward...

First, it’s safe to say MCD is not hurting SBUX.  U.S. same-store sales declined 6%, in line with my expectations and 200 bps better than Q2.  Traffic was down 4% in the quarter, which showed a sequential improvement from 1Q and 2Q when transactions were down 6% and 5%, respectively.  International same-store sales declined 2%, better than the -3% number in 1H09 and consolidated same-store sales improved 300 bps on a sequential basis from Q2 to -5%. 

Management commented on its earnings call that same-store sales improved on a sequential basis throughout the quarter in both the U.S. (as indicated by my May “Grass Roots” survey) and internationally, reflecting better traffic trends.  In the prior three quarters, SBUX had attributed the soft international same-store sales trends to weakness in the U.K. and Canada, which make up about 80% of the comparable sales store base.  Today, management stated that the U.K. market, like the U.S., has stabilized and is improving on a sequential basis. 

The strong operating model returns.  SBUX 3Q EPS came in at $0.24 versus my estimate of $0.22 and the street at $0.19.  SBUX reported a return to double digit operating margins and the U.S. segment’s first quarter of margin expansion following 12 quarters of decline.  Consolidated operating margin came in at 10.6%, excluding restructuring charges, with the U.S. segment posting a 13.4% number (up 460 bps YOY). 

Going forward, the company’s operating margins will continue to benefit from its cost savings initiatives.  That being said, the company delivered $175 million of savings in Q3 versus its $150 million goal and now expects to implement $550 million of cost savings in FY09, exceeding its prior $500 million target.  This reduced cost structure will result in an excess of $700 million in annualized cost savings in FY10 and beyond.

As a result of stabilizing sales trends and increased cost savings, SBUX now expects FY09 EPS of $0.74-$0.75, excluding restructuring charges, versus the street at $0.71.  The company is guiding to 13%-18% non-GAAP EPS growth in FY10 with U.S. segment operating margins growing 150-200 bps.  Management stated on its earnings call that SBUX should take a meaningful step in FY10 toward achieving mid-teen operating margins in its U.S. and international segments.  For reference, that is relative to the 13.4% and 8.1% operating margins reported in Q3 in those respective segments.  SBUX did not provide any same-store sales guidance for FY10 but its FY10 margin guidance is based on a continuation of the current soft sales environment.  Achieving mid-teen operating margins will ultimately rely on positive comparable sales growth.

A strong cash flow story.  I knew SBUX would pay down debt in the quarter but the company exceeded my expectations on this measure as well by reducing its short-term borrowings to a zero balance at the end of Q3.  The company expects the balance to remain below $50 million for the remainder of the fiscal year.  SBUX again lowered its FY09 capital spending needs to $550 million from $600 million, thereby improving SBUX’s free cash flow position.  The company continues to expect its FY09 free cash flow to exceed $500 million. 

Advertising.  CEO Howard Schultz stated that he is seeing an unprecedented level of investment in coffee advertising by a host of companies, the likes of which he has never seen.  He thinks this increased level of spending around coffee builds awareness and trial for the entire category and has benefited SBUX, particularly following the launch of the company’s own national advertising campaign in May.  To me, this means that MCD’s increased spending around its specialty beverage platform is not hurting SBUX as so many people had expected.  Instead, it is increasing trial at SBUX.



Five straight months of revenue declines without any positive delta.  On a moving average basis, Louisiana now looks like one of the worst performing gaming markets.


Well, it was fun while it lasted.  After a dreadful September, Louisiana was the best performing market in the country for a four month stretch.  That was a critical piece of our positive outlook on PNK beginning in November.  Not only did business turn “less bad”, but three out of the four months post September showed positive same store sales.

Since January, however, gas prices have been steadily increasing.  The impact of government stimulus and transfer payments has dwindled.  Unemployment and the savings rate continue to climb.  As can be seen in the following chart, the same store revenue picture reflects the harsh economic environment.  Moreover, the 3 month moving average is decidedly negative and the slope of that line is the steepest of all the gaming markets.


These results do not bode well for PNK which maintains 69% of its EBITDA exposure to Louisiana.  We’ve adjusted our model to reflect the state issued revenues, including these Louisianan numbers just released.  We are now expecting Q2 EPS of $0.02 on an adjusted basis versus the Street at $0.05.  Our adjusted EBITDA estimate is $47 million, approximately $2.5 million below the Street.  Our revenue estimate is $260 million versus the Street at $272.  We do think better margins will partially offset the revenue shortfall.

PNK will release earnings this Friday before the open.

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