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WWW – 3 KEY QUESTIONS

Takeaway: Here are three key questions we’d ask WWW’s CEO that are all central to the debate as we see it.

As we’ve done with a host of other companies recently, here’s our ‘3 Key Questions’ that we’d ask WWW’s CEO if we had a 5-minute one-on-one. The company is reporting its 1Q14 earnings on Tuesday, April 29th, so timing is key here.

 

Here goes…

 

1. Revenue? Please justify your 4-6% top line guidance this year and explain why this is not the ‘year of revenue growth’. If the following narrative is wrong, please tell us why.

  • 2012 was the year of the PLG deal. It was big, and painful initially – no EBIT, just interest from $1.2bn in debt.
  • 2013 was the year of integration. In 1H people moved around, brands were repositioned, and management realigned. Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.
  • Then comes 2014 – which should be all about revenue growth. Your global salesforce, which is the most efficient footwear distribution operation on the planet, has four new major tools (brands) in its toolbox. You’ve been lining up international distribution arrangements over the past 18 months. And while you strike new ones every day (we know it takes time), each of them is cumulative (i.e. signing three per month means that by now there should now be over 40). Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.

So, with Merrell reaccelerating under Gene McCarthy’s leadership (the guy is money), Keds on its way to becoming one of the top 5 brands in the portfolio ($110mm today on its way to $400mm), Sperry not pulling a face-plant this Spring like so many seem to be hoping for, and international finally being a driver for the new brands – at a time when Europe is undeniably strengthening for most Consumer companies, how can this year NOT be a year of significant revenue growth? Your guidance of 4-6% revenue growth seems ridiculous (see point below on your inability to give good guidance).

 

2. Why do you give guidance? You stink at it. Sorry to sound harsh, but the reality is that you guide down nearly every quarter, and then come back 13 weeks later and print earnings above where the consensus was in the first place. In theory, earnings growth will ultimately drive the stock price, but all too often your ‘earnings beat’ is never appreciated by the market because you’re simultaneously trying to set a low hurdle for the next quarterly report. Even your long-term guidance is flawed. You gave 5-year revenue and profit projections that suggest $3.70 in EPS.  But your EPS figure is $2.90. And what about that $1bn in free cash flow you should generate over that time period? That alone should pay down nearly all your debt, and save $0.30 per share in interest expense (that’s 21% EPS accretion). Add all that up and we get to EPS that’s 45% above your guidance.  So the question is why not either a) give guidance in the ballpark of what you know you can really hit or b) get out of the guidance game – one that you so rarely win.  

 

WWW – 3 KEY QUESTIONS - WWW guidance424

 

3. Why do you allow the conversation around the WWW story to revolve around Sperry? You have a $2.7bn revenue base, and less than $500mm of that is Sperry. Yet it is impossible to find a Wall Street research note (except ours) where Sperry is not discussed in the first bullet point. We know Wall Street can be short-sighted and myopic, but seriously, you have to control the conversation. Our math suggests that there’s $80mm at risk if the boat-shoe trend in the US rolls over (which is not happening this Spring as some feared), but another $300mm opportunity outside the US as the brand finally taps markets it’s been absent from pretty much forever. Anything wrong with our logic? If not, please take ownership of this debate, because certain parties on Wall Street that love to hate you are having a field day with it.

 

 

OUR LONG TERM THESIS

This is the most global footwear company in the world (legacy WWW). It sells about 65% of its units outside the US, and has seamless and sophisticated systems (SAP) such that all distributors speak the same language. The PLG brands, which we think are better quality overall, sell only 5% overseas, and that's simply because its former owner (Collective Brands) spent capital first on Sperry, then on US Payless stores, and did not have anything left in the kitty for international distribution of PLG brands. So now WWW can scale this superior content over its existing lean/mean infrastructure. We think it will drive an incremental $2bn in revenue over 5-years and an extra 400bp of margin. In the end, we get to earnings power of about $4.20, which is 45% ahead of what management guided at its recent analyst meeting. We're the first to admit that WWW probably won't make you rich here, as it will likely take a good 3-4 years to double. But in the meantime you're paying less than 12x next year’s earnings for a 22% EPS grower -- and this company has one of the best track records of anything in consumer.

 

WWW – 3 KEY QUESTIONS - www


LVS Q1 2014 CONF CALL NOTES

How 'bout them buybacks?  LVS: The anti-HOT.  MBS finally holds well but volumes were ugly.

 

 

PREPARED COMMENTARY

Macau:

  • Another record quarter, adjusted profit EBITDA grew 49% to a record $940 million annualized dollars
  • Mass table win for the quarter, a record $1.34 billion annualized dollars
  • Growth rate was 40% faster than the Macau mass market as a whole
  • VIP rolling win +18.2% = $1.456b or  more than $39k/table/day
  • #1 position in Macau for GGR w/ 23.2% share of revenue 
  •  Cotai Strip + dining retail + retail + convention = improved cotai strip now attracting more valuable customer = increased returns across property portfolio

Confident about Macau growth:

  • Increase utilization of hotel & suite inventory on Cotai Strip - current 56% of inventory = 9,000 keys...will increase to 15,000 in late 2015 with addition of St. Regis and Parisian
  • More people visiting properties on Cotai Strip...and visitation will only increase because of Governmental investment in infrastructure (railroad, bridges, highway, and add'l immigration entry stations)
  • Visitors who travel from further distances will stay longer = increased spend on dining & retail as well bring larger gaming budget

Marina Bay Sands Singapore:

  • Hold well above normal (for a change)
  • EBITDA $435m

Current Developments:

  • Parisian Macau on budget and on schedule subject to gov't approvals, expect to open 4Q2015
  • St. Regis tower continuing and target opening 4Q2015, will add 700 rooms

New Opportunities:

  • Japan: activity levels remain robust
  • Korea: Increased potential & looking forward to development opportunities
  • The MICE model positions LVS very well and able to compete

Compliance:

  • take very seriously and lead industry and all constituencies, to lead industry, proud to lead industry in their efforts

Capital Allocation:

  • Will return of excess capital to shareholders
  • as EBITDA & FCF grow, capital not needed will be returned to shareholders
  • no requirement for significant capital needed in near future due to long lead time of new developments
  • $620M stock repurchase authorization remaining as of March 31, 2014
  • expect to repurchase $75M per month
  • leverage: gross leverage 2x debt/ebitda or 3x for future debt needed for new IR markets
  • will maintain strongest balance sheet within the industry

 

 

Q&A

  • VIP play/junket less robust any insights, changes in behavior? - nothing has stopped Chinese or other Asian from challenging luck.  Geopolitical issue impacting VIPs.  SCL's drivers are rooms and mass play, thus SCL less impacted.
  • Potential for supply and demand to meet/cross - no idea, not within the realm of the future, not within my (Mr. Adelson's) lifetime.
  • Share repurchase during Q1, $80.80/share average, update on purchases April to date?  No comment...but still see value in the stock.
  • How value stock vs. growth potential vs. $600M remaining authorization...FCF in 2014, so significant that could repeat buy-back with add'l $2B will make the decision on share repurchase vs. dividends during the course of the year.
  • Mr. Adelson hasn't sold LVS shares in 8 years...
  • Macau strategy shift to mass market - how drive yield per table higher?   Chinese population visitation to Macau ~2%, SCC and Venetian will benefit.  Grew tables 181 tables YoY, target table win of  $15k-$16k/table.  Key is amount of tables coupled with number of rooms.  This year's management bonuses are predicted on increase in table productivity
  • Dragon Palace: not yet open
  • 1928.HK share repurchase/listing requirement - trying to get free of listing in HKSE, but would take $15B - $20B to delist 1928.HK, but would rather payout to shareholders via share repurchase and dividends
  • VIP mix direct vs. junkets: not necessarily increase direct channel, good relations with junkets.  Most significant opportunity is non-Guangdong visitation which could be $600M, $700M, or $800M/qtr opportunity and will comp rooms to high-value casino customers
  • Mass: how use hotel rooms to increase mass play?  Venetian $470m vs. $348m driver was mass conversion 
  • MBS: all big play VIPs are direct, no junket involvement
  • Looking for additional 2,500 to 3,000 rooms in Macau.  Looking at land know as Tropical Garden, would also like to share in land on Lot 7.  Because of infrastructure build-out of bridge and train system.  Currently room constrained during peak holidays
  • Venetian Mass customer = $1,500 to $5,000 per night GGR.
  • Why leverage ceiling decrease from 3.5x from last conf call to 3.0x - no reason other than aversion to debt; earnings and FCF so plentiful
  • MBS: Land request to expand update - Singapore doesn't work quickly, look to all agencies for input and feedback.
  • Retail Mall sale view - as long as growing rents by 20%/year not looking to sell.  When growth slows to mid-single digits to 10%, then look to sell at 4% cap rate or lower.  EBITDA and rental revenue occurs because of percentage of sales, which occurs in 2H of each year.

TGT – Adding To Best Ideas List as a Short

Takeaway: We’re Adding TGT to our Best Ideas list as a short. We’re hosting a call next Wednesday, April 30th to review our thesis. Details to follow.

We’re Adding Target (TGT) to our Best Ideas list as a short, and will be hosting a call next Wednesday, April 30th at 11am to review our thesis. Details to follow.


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Poll of the Day Recap: 83% See US #HousingSlowdown

Takeaway: 83% YES; 17% NO.

Poll of the Day Recap: 83% See US #HousingSlowdown  - houses and hotels

 

#HousingSlowdown is one of Hedgeye’s Q2 Macro Themes. We have been big housing bulls over the last 18 months. But the party is ending. Asymmetry in being long has flattened. Price follows demand on a lag and demand is slowing as affordability declines, regulatory changes drag on liquidity, and institutional interest ebbs. 

 

So in today’s poll we asked: Is the U.S. housing market slowing down?


At the time of this post, the clear majority went toward 83% voting YES; 17% responding NO.

 

(Voters sharply swung so much in one way, that we didn’t receive any comments on why people voted NO.)

 

Here’s a sampling of some of the responses we received:

  • “Yes, slowing down fast, and for a while now as I mentioned before. PARTICULARLY interesting rebuttal to the bulls is that the weakness was bigger in the West while the Northeast region was the most resilient. Sort of refutes the weather excuse the bulls make, no?”
     
  •  “Housing stats have definitely slowed on the latest reports. But the big picture in housing is long-term distorted, so today's ‘slowing’ doesn't mean what it did pre-2007.”
     
  • “No wage increase to match increase home prices.”
     
  • “Low inventories and lower rates equate to a one percenters recovery and the continuing disconnect between the Fed/Admin and the middle-class.”
     
  • “I hope so, need the price to drop for me to buy in a couple years... keep them rates low for me too Yellen #30Fixedrateat3.0anda10%discount.”

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BIG MARCH ON THE STRIP

We’re projecting a +15-20% increase in Strip gaming revenues for March

 

 

Based on strong airport traffic and a high number of taxi trips – both statistically significant in driving gaming revenues – March may have been a blockbuster.  Moreover, some pent up Baccarat demand could’ve favorably impacted the high end along with potentially above normal hold percentage.  In total, we’re projecting YoY GGR growth of +15-20%.  For the first 2 months of the quarter combined, GGR as reported by the State of Nevada fell 12%.  Adding our +15-20% projection for March, GGR will have fallen only 3-4%.  Tables should lead the way in March as we only project flat slot volume.  Here are our projections:

 

BIG MARCH ON THE STRIP - 12



Rising Oil Prices Aren’t Going to Help What Ails US Consumers

Takeaway: Another #ConsumerSlowing catalyst for the U.S.

After holding CEO Keith McCullough’s TREND line of support yesterday, WTI crude is up to $101.91 today. It has no resistance to $105.03.

 

It is another #ConsumerSlowing catalyst for the United States. Never mind CRB Food Stuffs which is up over 21% YTD.  Sure, the 7:1 iSplit from AAPL was cool, but there’s this other thing called Global Macro risk. That’s still going on.

 

On the other hand, if you don’t eat, and you don’t put gas in your car, you’re all set.

Rising Oil Prices Aren’t Going to Help What Ails US Consumers - Crude

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