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LEISURE LETTER (04/10/2014)

TICKERS: PNK, RHP, NCLH, MTN

 

EVENTS TO WATCH:  UPCOMING EARNINGS / CONFERENCES / RELEASES

Thursday, April 10

Mid-America Gaming Congress (Columbus, OH)

 

Thursday, April 10

HST Investor Day

 

COMPANY NEWS

PNK - CEO Anthony Sanfilippo and CFO Carlos Ruisanchez met with Albany Mayor Kathy Sheehan and toured a proposed site in the city adjacent to Exit 23 on the New York Thruway, neighboring the town of Bethlehem.  

TAKEAWAY: PNK’s intentions are unclear and whether the company is looking for a management contract or an all-inclusive management and ownership opportunity. Regardless the direction, a new growth strategy is needed.

  

RHP – Judge Norman Haglund, a Denver District Court judge, on Wednesday dismissed a lawsuit for lack of standing filed by a group hotels (including the Curtis, the Broadmoor, the Brown Palace, the JW Marriott Denver Cherry Creek, the Courtyard Denver Downtown, the Magnolia, the Oxford and the Westin Westminster hotels) against Aurora's Gaylord Rockies Hotel and Conference Center.  The dismissal cleared the path for the 1,500-room hotel and water park near Denver International Airport.  The plaintiffs sought to overturn the $81.4 million award to Aurora under the Regional Tourism Act by the Colorado Economic Development Commission in 2012.  Depending on the outcome of another lawsuit, construction could start on the $750 million to $850 million Gaylord project sometime next year, with an opening in 2017. The property will be located on 64th Avenue between Tower Road and E-470.

TAKEAWAY: Another Gaylord Conference Center for both RHP and MAR in 2017 - a year in which the US will experience a large increase in hotel rooms with more than 3,500 also at Genting's RWLV.

 

SHO - held an investor day yesterday by the senior management team highlighted the significantly lower leverage (debt plus preferreds divided by LTM EBITDA) >8x to <5x today and a goal of <3x in 3 years) as well as a more focused and improved hotel portfolio. Q1 RevPAR guidance was raised.

TAKEAWAY: Phase 1 of the restructuring is complete, Phase 2 which includes driving room and F&B revenues is more difficult.

 

NCLH - canceled port stops in Roatan, Honduras this week after a crew member from Norwegian Pearl was killed during an attempted robbery

TAKEAWAY: More negative press associated with the cruise industry.

 

MTN - in a bizarre twist to the Park City Mountain Resort-Talisker lawsuit, PCMR filed documents with the court wherein PCMR indicated it would dismantle and remove most of the area's chair lifts except for Jupiter, Thaynes, and Motherlode.  Talisker's eviction notice to PCMR maintains that structures and improvements "that are affixed" to the property belong to Talisker. PCMR disagrees and asserted they can remove most of the lifts because although the ski lift towers are bolted to concrete footings, they are not "otherwise affixed to the land."

TAKEAWAY: Sounds like capex will be higher than MTN's forecast.

 

INDUSTRY NEWS

US Gaming Industry - the United States commercial casino industry generated $37.8 billion in 2013, expanding by 1.3 percent. The growth in gaming revenue was the result of gaming expansion in new markets, but was tempered by existing markets experiencing declining revenue and market cannibalization.  In 2013, there were 23 states with commercial gaming operations. Of these states, six expanded gaming in 2013. Gaming expansion is defined as the opening of new casinos or expanding casino game offerings, such as table games.

TAKEAWAY:  New property openings continue to pressure ROIC. 

  

Revel Atlantic City - The city's main casino workers' union, Local 54 of the Unite-HERE, issued a report on Wednesday claiming Revel Casino Hotel is worth between $25 million and $73 million.based on Revel's finances through publicly available documents versus $2.4 billion cost to build.  Revel is presently seeking a buyer. Presently, the casino, which is seeking a buyer.

TAKEAWAY: Yeah, yeah we get it. Revel was a disaster.

 

Las Vegas Valley feeling ill - Southern Nevada Health District officials report they have seen an increase in cases Norovirus , the gastrointestinal illness, over the past few weeks. Health officials said an investigation began March 28 when people at a conference at the Planet Hollywood started feeling unwell.

TAKEAWAY: Norovirus not just for cruise ships. 

 

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.

TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


RH - Three Key Questions

Takeaway: If we had five minutes or less with RH’s CEO, here’s what we’d ask.

The setup -- you have a five minute meeting with the Gary Friedman, CEO of RH. Here are the key critical uncertainties that we think are relevant to the investment thesis today. We did this earlier this week with Target­ -- one of our top shorts. So let’s keep it balanced and do the same for our top long, RH which we think should triple over 3 to 5 years.

 

1. Logistics Network -- Today vs. Tomorrow. One of the biggest Bear arguments against RH is its inability to ship product on time and in the right quantity (i.e. a 6-piece living room order could be delivered in 3 shipments over 12-weeks). That not only delays when the company can collect revenue, but could also impact customer attitude towards the brand and its ability to meet delivery expectations. We have no doubt that RH could work through these issues today, especially with its newly upgraded fleet of DCs. But the reality is that RH has been shrinking its square footage base for the past six years. Starting next month, it goes on an explosive run of growth in square footage – from 800k square feet to nearly 3x that amount over a five-year period. So the question here is this…If you are having challenges now as a $1.5bn business over 70 stores and 800k sq feet, how can we be confident that the company can deliver product under a competitive time frame when it is three times the size? Does that mean that instead of having 5 DCs and 7 hubs, it needs to open another 5 mega-regional DCs in the top MSAs? Or another 25 facilities throughout the country? What’s the right answer?

 

[Note: Though we cannot yet articulate the answer to this question, in our model we assign a capital cost to both the SG&A and Capex lines to account for future capital needed to improve shipping capabilities. We give RH about an extra $80mm per year in capex, while we add an incremental $800mm over 5-years in SG&A – both of which are well North of what is expected for RH to continue on its growth ramp).

 

2. What’s the Optimal Store Size?  The size range in RH’s fleet is daunting. It has Legacy stores at 8,000 feet, Design Galleries at 25,000, and the Next Gen Design Galleries as large as 60-70,000 sq. feet (Atlanta, Vegas). So far, the company has learned that ‘bigger is better’ meaning that the store productivity on a large box eclipsed the Legacy productivity.  The math is such that there are 8,000 foot stores operating at $700/sq ft, or $5.6mm annually. But then there are stores like Houston at 22,000 feet that are doing about $2,500 per foot. Yes, that’s about $55mm per store. And that’s not a pipe dream…that’s proven.

 

The questions then, are a) is it realistic for some of these Next Gen Design Galleries to be running at over $100mm per box? b) at what size do you think you hit a point of diminishing returns with box size? c) you have 65 Legacy stores in the fleet, that you indicated you’ll chop away one by one over time. But the reality is that many of these are solid real estate locations, and your rent terms are better there today than if you were to find new space on your own. Why not keep most of these stores open, and use them to focus on a single category – RH Kitchen, RH Baby & Child, RH Furnishings, RH Whatever…
    

3. Dot.Com Ratio Shrinking? Today RH has the highest ratio of e-commerce as a percent of total sales (47%) out of any retailer shy of Amazon and Williams-Sonoma (48%), but then the competitive landscape craters from there. Pier 1, for example is about 4%.  That’s a pretty huge competitive advantage for RH, in that it has achieved so much success reaching customers who live nowhere near a RH store.  But now that square footage will begin to accelerate so meaningfully, the dot.com ratio almost has to come down. If it does not, then it will likely be due to productivity of the new mega-stores coming in at levels we’d find disappointing. We don’t think that will be the case. We’re modeling that e-commerce comes down to 40% over a four-year time period (while still tripling to a $2bn e-comm revenue stream). Our question to Gary would be ‘how small will you let dot.com get as a percent of the total.’ Our sense is that he’d come back with an answer that sounds something like “I could care less where the sale originates – in a store, or online – as long as we book the sale.” We’re cool with that, and largely agree. But it’s a key question to ask nonetheless.

 

Bonus Question (for those times you get an extra few minutes to sneak in another question)

Fashion Risk. Even your average non-fashionista type with no sense of design could walk blindfolded into a RH-themed room and know within about 3 seconds that it is RH. It just has that ‘RH look’. It’s a look that has been very relevant for three years now. The question is whether a) RH just happens to consistently nail the current trend, or b) it leads consumer trends by sourcing the product it thinks consumers will want, and then merchandises and markets it in a way that the consumer will want to buy it. Our opinion is that RH is an example of ‘B’ – much like what Ralph Lauren has become in the apparel space (seriously, when is the last time Ralph missed a fashion trend? Answer – never). Though we’re kind of answering this question before we ask it, we would like to know more about Gary’s process for driving demand around a given assortment. He alone can offer the best insight on this one for RH.

 

RH - Three Key Questions - RH Financials


FLASHBACK: #GrowthSlowing (Lots of Charts)

Takeaway: We are getting increasingly negative on the slope of domestic economic growth.

This note was originally published December 12, 2013 at 17:45 in Macro

FLASHBACK: #GrowthSlowing (Lots of Charts) - turtlecrossingroad

Yesterday, Keith and I did a full slate of meetings with funds in NYC; without violating any confidentiality by getting bogged down in the details, here are the key takeaways we were effectively pounding the table on:

  1. We still like our #EuroBulls theme (CLICK HERE to launch our @HedgeyeTV video) and continue to see opportunities on the long side of European growth equities. We continue to like the UK and GBP then Germany and EUR in that order.
  2. Based on early warning signals, we think 3Q13 is a cycle-peak in the sequential rate of US economic growth. If we were mandated to allocate capital to US equities, it would be in high yield, slow growth, low short interest and/or commodity-linked stocks, at the margins – basically a return to the 2011-12 playbook. The UST 10Y yield has probable downside to 2.5% in this scenario.
  3. A potential 1H14 macro theme we see developing is inflation-hedge/consensus yield chasing plays continuing to make higher-lows alongside US equity volatility (CLICK HERE to launch today’s @HedgeyeTV video on a potential breakout in the VIX). That list would include gold, commodities, emerging markets, TIPS and REITs. The Abenomics trade (i.e. short JPY/long Japanese equities) would make lower-highs in this scenario.
  4. Fund flows have the opportunity to buoy the US equity market well into 1Q14, though we’d expect growth data to be decidedly cooler by then if the Fed does NOT taper. We are very differentiated from consensus in that we think that a return to prudent monetary policy is the only way to promote sustainably faster rates of domestic economic growth. We don’t buy into the consensus fear-based whining about deleveraging and the perceived risk of higher rates in the housing sector.
  5. If the Fed tapers or signals imminent tapering, we’d abandon each of the aforementioned views and would be buyers of any subsequent US equity pullback. If the Fed does NOT taper (as we expect), we’d be sellers of any subsequent US equity strength.

 

Today, we received a great follow-up question from a very sharp client in the fixed income space: “What is the data you’re looking at to support your view that GDP growth will slow down?”

 

As with any inflection-based call on growth and/or inflation, we start with the market’s risk management signals – which tend to lead the reported data. The USD is decidedly broken from a quantitative perspective and long-term interest rates are making lower-highs vs. the YTD peak in both growth data and #GrowthAccelerating expectations.

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - dale1

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - UST 10Y

 

Moreover, both are declining on a QoQ average basis, which is historically something you’d see during periods of marginal stagflation (i.e. Quad #3 of our GIP model = Growth Slows as Inflation Accelerates).

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - GIP Model Backtest

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - Quad  1 vs. Quad  3

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - USD  UST Rates and GDP

 

That reflexive relationship is something we’ve seen throughout the YTD:

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - 4

 

As it relates to early warning signals, the ISM data appears have materially inflected here, which confirms what we’ve already seen with respect to the respective trends in consumer and business confidence.

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - 5

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - 1

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - 2

 

Recall that inventories juiced the 3Q GDP print – which we’ve argued is a healthy, pro-cyclical response to increased business confidence. Well, now said business confidence has inflected to the downside here in 4Q and we anticipate inventories will follow suit when 4Q13 GDP is reported.

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - 3

 

Again, our call for an inflection in growth is in the very early innings so you won’t see it in the broad swath reported data just yet – much like you didn’t see a ton of data to support our #GrowthStabilizing and #GrowthAccelerating calls at the start of the year.

 

FLASHBACK: #GrowthSlowing (Lots of Charts) - US QoQ

 

I’m guessing to the naked ear we sound about as crazy as we sounded roughly one year ago when we were pounding the table on long side of US equities and on the short side of anti-growth assets (e.g. gold, EMs, commodities, etc.) as the biggest US growth bulls on the street. For now, that’s a position we feel comfortable taking in the absence of a change of heart at the Fed.

 

Please feel free to email us with any follow-up questions or if you’d like us to forward you the analyses supporting the conclusions laid out at the start of this note.

 

Have a wonderful evening,

 

DD

 

Darius Dale

Associate: Macro Team


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Poll of the Day Recap: Majority Says US Housing Market Slowing

Recent reports of declining mortgage applications could be the first sign of a #HousingSlowdown – one of Hedgeye’s new quarterly macro themes.
 

We wanted to know where you stood on this issue, so we asked in today’s poll: Do you see that the US housing market is indeed slowing?


At the time of this post, most people feel the US housing market is slowing with 69% responding YES; 31% saying NO.


Some who voted YES said they felt it so much that they (and friends) were once looking to upsize but have now backed off. Others saw slowing especially in low-end homes.

 

Hedgeye CEO Keith McCullough voted YES noting, “Given rates have been falling since their December highs, the MBA mortgage purchase application data is flat out scary.”

 

Other noteworthy YES comments included:

  • “Prices [are] far outpacing capacity for first time home buyers to purchase.  When funds cease to be the marginal buyer of existing homes, they may turn into a marginal seller.  That would leave a vacuum of demand until the price adjusts to levels at which first time home buyers, 24-30 year olds, can afford to be owners via their incomes.”
     
  • “Banks aren't interested in lending at these rates and they also are scared of the future economic collapse that is coming.”
     
  • “Pent up demand and investor buying is flattening out. Wage and job growth stagnating, baby boomers trying to retire (so paying off debt, reducing RE assets & saving money) and 1st homebuyers saddled with 60 month car payments & student loans. Getting into and out of a mortgage costs have risen due to loan fees & taxes. It now costs 10% or higher just to buy/sell.”
     
  • “[Yes] because of year over year reduced housing prices. Lack of demand is the culprit due to growth slowing in income, etc.”
     
  • “The fundamentals of housing (demand and supply) turn well in advance of price. Demand has been rolling over for ~9 months now and prices are just beginning to show signs of deceleration. QM is a significant and underappreciated headwind for housing.”

Interestingly, one YES commenter said the US housing market’s slow growth was old news, while another said it wouldn't be a media issue for another 9-12 months “meaning most consumers and investors won't have a clue until it's too late.”

 

NO voters, however, said that they hadn’t specifically experienced a slowdown where they lived, further explaining why they felt it was simply location dependent.

 

One NO voter felt a slower housing market wouldn’t happen for another year, and a few others hoped it would benefit them when they looked for a house in terms of lower pricing. (One responder even said that because rental rates continue to go up they’re being practically forced to look for a place to buy.)

 

Maybe Keith can sum it up for us:  “Housing $ITB -0.9% today leads losers again = US #HousingSlowdown.”

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Nike Jacking Up Jersey Prices: Will Consumers Rebel? | $NKE

Takeaway: Nike has total control over this market; they can essentially do whatever they want.

Nike Jacking Up Jersey Prices: Will Consumers Rebel? | $NKE - SP14 AT SB Jersey 001 large

 

Nike raises NFL jersey prices

  • "Nike, which makes the official league uniform, has decided to raise prices on two of the three types of jerseys it sells. Nike did not announce the increase in price, but retailers, including the official league online store, started charging more on April 1."
     
  • "The Game jersey, which is the cheapest replica, will still cost $100. But the price of the Limited jersey, which has embroidered twill numbers and letters in place of the silicon printing on the Game jersey, has jumped from $135 to $150. The Elite jersey, which is the closest to what the players wear on the field and boasts being water repellent and has a tighter, tailored fit to the body, went up nearly 20 percent to $295, up from $250."
     
  • "NFL spokesman Brian McCarthy said that Nike and the retailers, not the league, determine the prices. But sources told ESPN.com that it was Nike executives alone who made the decision, implementing the new prices as the minimum prices retailers could sell the different style of jerseys for."

Takeaway From McGough:

Nike has a monopoly over this market. It can raise prices at its own discretion -- presuming that  consumers don’t rebel. (If only it was that simple for its footwear and apparel business!) Nike has successfully raised prices over the past couple years as input costs moderated. Now, with commodity costs switching from a headwind to tailwind, and very little pricing power left to exercise, we think that the next move on the gross margin line is down. $295 for a jersey?

 

Editor's Note: This is a complimentary research excerpt from Hedgeye Retail Sector Head Brian McGough. Follow McGough on Twitter @HedgeyeRetail

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Cartoon of the Day: Dollar Down!

Takeaway: The USD Index at $79.78 remains well below our long-term TAIL risk line of $81.17 — yes taxing US Consumption.

Cartoon of the Day: Dollar Down! - Fallen dollar

 

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