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Cartoon of the Day: 0% Credibility

Takeaway: "The more I travel and talk this through with investors, the less convinced most are that this ends well." - Hedgeye CEO Keith McCullough

Cartoon of the Day: 0% Credibility - Inflation 04.29.2014


Rebuilding the Desert Oasis...



Prepared Remarks:

  • In Las Vegas continue to make target investments in properties to differentiate properties and thus drive/increase visitation - viz., New Strip Frontage at Monte Carlo; NYNY Hershey's, Tom's Urban & Shake Shack - later two opening in Dec 2014; AEG Arena, 20,000 seat arena; about to break ground also The Park.
  • Mandalay:  The Hotel conversion into The Delano should complete in September and will drive significant RevPAR growth
  • Plans to expand Mandalay Bay Convention Center... increase Convention mix to increase rate and spend
  • CY 2014 total room nights will be 16% from convention mix
  • Convention & Trade Show business will solidify and drive high margin corporate business
  • Music Festivals:  Festival lot near Luxor, new plan for 33 acres near Circus Circus to host Rock in Rio. 
  • MGM National Harbor MD expect to open summer 2016
  • Springfield, MA: go before Commission in June 2014, monitoring referendum
  • Japan: been often, significant potential for tourism, if Japan pursues "integrated resort" option
  • M-Life: effective customer acquistion tool
  • "My Vegas" social gaming site provides >850,000 ADU, new partnership with PNK (was AmeriStar).
  • MGM Hospitality, joined forces with Hakkasan...growing to develop hotels around the World.
  • Sixth quarter of EBITDA growth and margin improvement
  • Flow through was 55% vs. 50-60% expectation
  • Luxury Properties: EBITDA +17%
  • Value/Mid Properties: EBITDA +15%
  • Casino: domestic rated play "improving" 
  • Strip RevPAR 14% based on +200 bps occupancy and +12% ADR
  • Convention room nights during Q1 reocrd
  • Q2:  Expect RevPAR +5% (not indicated if Strip or Portfolio)
  • City Center record results, resort operations +2%
  • Aria EBITDA down slightly due to -150 bps hold comp, RevPAR +14%
  • Vdara record quarter with 89.5% occ +400 bps, ADR +16% to $185, RevPAR +21%
  • Crystals EBITDA +30%
  • Balance Sheet: $1.2b of liquidity under revolver, while MGM China $1.5b available at the end of Q1
  • Cash:  $1.1b at MGM of which $555m at MGM China
  •  City Center cash balance $345m including $72m restricted cash
  • CapEx $72m in Q1 and MGM China $121m with $14m spend at MGM Macau and $107m on Cotai development
  •  MGM China:
    • Rev $941.
    • EBITDA +33% pre branding fee $16.5m
    • 130 bps margin improvement, due to mass and VIP Hold
    • Main floor table game
    • Focused on yield optimization looking at VIP / Mass table yields and product upgrades
    • Building customer base for Cotai opening in 2016
    • Cotai: 3x rooms and 2x gross gaming floor area
    • MGM Cotai: well underway
  • Marketing: Robust spend, social media
  • Las Vegas #1 trade show destination for past 20 years, key to growing market is growing corporate and trade show business


Q & A

  • Expansion at Mandalay how will mix change:  mix always highest in Q1, good in Q2, but Q3 is weakest, and flat/up in Q4.   Fortune 100 Tech firm booked in Q3 for 17,000 attendees (ITYFTY is a friend in 2014)
  • Noise around Macau market and junkets - Grant Bowie "just that, noise...steady but quieter month.   Mass market is now anchoring EBITDA performance"
  • MGM China 70% EBITDA from Mass segment from 45% of mass table mix.
  • How drive Mass with current 70% at MGM China - solid team, customer flow and supply of customers are strong, lots of new mass players.  Redeploy tables and working with junkets to improve yields and casino box growth.  Need to expand market penetration prior to Cotai opening.
  • Domestic CapEx spend - $425 million, includes MGM contribution to AEG Arena
  • Corporate customer call volumes - 55% Corp Mix in 2013, and 2014 mix is higher
  • How solid are 2015, 2016 booking trends - great Citywide in Q1 2014, but January RevPAR +9%, February RevPAR +10% versus Q1 results.   Up double digit pace in 2014 vs. 2013 and 2015 vs. 2014.
  • Strip & RevPAR growth and gaming 40% of revenue, how view gaming outlook for 2014 and beyond - US business improving as seen in slot handle and slot win (non Bacc table revenues and market share both increasing), not predict gaming revenue but more people coming to LV.
  • Arena business very strong for remainder of 2014
  • Independent properties for sale along LV Strip, update on thoughts of buying/selling City Center or Strip properties - love owning on Strip, did not chose to sell a partial interest in Crystals in 2013 because NOI still increasing.   Not actively pursuing any acquisitions or divestitures on Strip.
  • Dispositions - large delta to high-end and value properties, how think about narrowing gap in valuations -- MGM looked to invest in luxury properties with 80% of capex in luxury since the crisis and today luxury is 18-20% below 2007 peak cash floor.   "Core" is down >30% off peak (other half of portfolio). 
  • Couple of properties on the market, given availability of capital, and interest expect more interest in asset purchases.
  • Bellagio margins - no singular event or item, power of building   
  • Mandalay: benefited from strong conventions
  • MGM Grand: despite difficult hold comp, improved due to non-casino component
  • FTEs flat YoY
  • Regional development:  
    • MD on track, break ground in a few months, working with County, focused on design, development and programming, no change to the $1 billion budget, most profitable non Las Vegas casino development in the US
    • Springfield - waiting for appeal referendum; Supreme Court must rule before July 9th to make November ballot; awaiting Commission license award. However, gaming is polling favorable across MA with voters
    • Anton will oversee Detroit, MD, and MA.
    • no change in budgets nor timetables
  • M-Life Tiering - movement up levels and thus better profitability?  Seeing double digit 11%-12% growth in Platinum level due to growth in non-gaming spend
  • Confidence in MD property and growth vs. MD tax rate - 3 airports within easy drive and Southwest Airlines is a big driver of traffic; strong Int'l visitation; confident in highly affluent, diverse, high gaming propensity of local population base.  Look at results of MarylandLive.  Vehicle circulation of I-95 Interstate traffic.
  • Looking to Q2 for RevPAR seeing strength in May and June and 3Q - any color... April was challenged with Easter, May looks good, very strong similar to first quarter months outside of ConExpo, June is usual month, some decent rates but between Father's Day and Graduations difficult.


Takeaway: Smoked the qtr with solid setup throughout 2014 and beyond. WWW will beat again, and again..

WWW blew away the consensus by 27% -- coming in at $0.38 vs. expectations of $0.30 – and right in-line with our model sans a slightly higher tax rate. We’re not making any substantive changes to our model, and maintain our view that WWW will beat the company’s stated long-term plan (and consensus) by over 40%.  


WWW is easily the most frustrating Retailer/Wholesaler we follow – but it’s also one that offers perhaps the best opportunity. The reality is that the Street latches on to every little negative data point about a specific market for one of WWW’s 16 brands – even if it ultimately does not negatively impact consolidated financial results. Seriously, 80-90% of the questions we field from the investment community have to do with Sperry, despite the fact that it accounts for less than 20% of WWW’s sales. When Sperry first weakened in January, the stock lost $900mm in value, or about 30% of total market cap, because people were afraid of losing 4% of cash flow. And that ignores the potential to turn Sperry’s $450mm in sales into $1bn.


Unfortunately, this unbalanced and outsized reaction does not reciprocate to the upside – positive datapoints and anecdotes on any of the brands are often discarded. We’re not arguing that people should give the stock credit for individual wins on the part of the brands in certain product lines or markets. That would be irresponsible and unrealistic. But we also can’t justify it on the downside, either.


This tells us that before you touch this stock, you need to ask yourself if you can stomach owning a(nother) portfolio or not. It’s one where you’ll have to deal with a lot of negativity around anecdotes into specific pieces of the portfolio – but you’ll get paid when the company ultimately has to release earnings and show the world that it a) knows how to run a portfolio, b) has far more assets that are winning than assets that are losing. This is all about execution. Pull up a 10-year stock chart. If you want to bet against that, be our guest.


But we need far more than a good track record to want to own a stock like WWW. We need superior earnings power, and a disproportionately low valuation.  That’s what we have here. Despite the company’s tepid long-term guidance, we’re coming up with a far superior EPS growth CAGR of 23%. A 17x p/e (14x next year) might seem rich for those who think that WWW is a low-teens grower. It certainly would to us if we had their model. But the problem is that those people have the ‘E’ part of the equation wrong. They were wrong this quarter. And they’re going to be wrong again next quarter. The company might have a heavy hand in setting conservative guidance, but ultimately the truth will come out in the numbers. In addition, with Sperry being down in the upper teens this quarter and the stock reacting instead to the 26% consolidated earnings beat, this gives us a glimmer of hope that maybe the WWW conversation is shifting away from Sperry on the margin.










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 – GONNA BEAT AGAIN - WWW guidance 0429


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.



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.

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In the face of lower yields in the Caribbean, fuel cost savings and the new share repurchase program are the offsets. Street remains overwhelmingly bullish. 




  • 23% increase in 1Q capacity
  • Getaway/Breakaway in 1Q:  good pricing, onboard revenue improvements 
  • 1Q:  Driving price at the expense of occupancy
  • 2014:  Wave Season in normal pressure.  Brutal winter/polar vortex hurt consumer spending and reason for lower yield guidance 
    • Most agents we contact with said the cold winter helped bookings 
  • 1Q:  Incremental dry dock- Norweigan Spirit dry dock of 3 weeks
  • 1Q:  Additional $2MM in onboard cost upgrade, also increased security for Norweigan Jade due to incident
  • 1Q weighted cost of debt:  3.8%;  should improve at Escape and Bliss enter fleet as financing is cheap
  • Income tax benefit:  change in corporate structure
  • Rolling over strong net yield comps from 2013
  • In a promotional environment
  • 2Q:  38% in Caribbean, 23% Europe, 11% Bermuda, 10% Alaska
  • European market:  improved pricing/occupancy
  • Alaska:  Norweigan Sun unique itinerary doing well; stronger pricing/bookings
  • Epic:  decision to move to Barcelona in April 2015
    • Removing transatlantic voyage, further improving yields


Q & A

  • Timing of share buyback:  feel stock not reflective of company potential particularly as cash builds in 2H 2014
  • Pricing comparisons:  800/900 bps different from other players
  • 1Q:  give up a little bit on load 
  • Asia:  on their radar
  • Genting ownership:  no new news, cleared requirement with HKSE;  stock right where they want it to be
    • Comfortable sitting and waiting but not happy about stock price
  • Caribbean trends:  Wave season did not start out robust;  booking trends since mid-Feb improved (some due to promotions); feel a little better about landscape
  • Europe:  quite confident trend going right direction but off of very low comps; could see a couple more years of nice growth
  • Want to get past Q2
  • Q4 too early to tell
  • Net yield downward revision:  driven by price, not onboard
  • Getaway:  $5MM fuel improvement 
  • 2015 deployment:  Europe (21%), Caribbean (45%)
  • One competitor had been holding price but NCLH would not be 'reckless' in holding price for empty cabins
  • Escape decision to homeport in Miami:  Epic redeployed to Europe.  Caribbean 2015/2016 capacity roughly flat
  • Book load factors:  highly favorable (esp Europe:  Baltic/Canary/Med); on par with Hawaii;  heavily booked in Canada/New England;  Caribbean:  still has opportunity
  • Pricing by region:  Europe (up double digits);  Alaska (low single digit);  Hawaii( doing well); Canada/New England (priced well);  Caribbean (lower than where they want to be)
  • Net yield reduction:  Caribbean is the reason
  • Core fleet vs 2 new ships:  contraction in overall industry but Getaway/Breakaway still maintain double digit premiums
    • We saw this in our pricing survey where the core fleet pricing is dropping faster than that of Getaway/Breakaway.
  • Industrywide Caribbean capacity in 2015:  cautiously optimistic; will be better environment in 2015.
  • Any share repurchases not included in guidance
  • Fuel efficiency:  seeing in organic fleet ($2.5m),  Getaway $5-6m better
  • Q3:  solidly booked, environment looks good

LEISURE LETTER (04/29/2014)

Tickers: MGM, BEE, NCLH



Tuesday, April 29

  • Las Vegas March revenues out
  • NCLH Q1 – 10am , Passcode: 22334128
  • VAC Q1 – 10am , Passcode: 4679876
  • MGM Q1 – 11am , Passcode: 20455736

Wednesday, April 30

  • PNK Q1 – 8am , Passcode: 27759612
  • GLPI Q1 – 9am
  • MGAM Q1 – 9am  
  • MAR Q1 – 10am , Passcode: 10575194
  • H Q1 – 1130am , Passcode:  11561402
  • BYD Q1 – 5pm , Passcode:  44440004

Thursday, May 1

  • WYNN Q1 – 430pm , Passcode:  17666834
  • HST Q1 – 10am
  • OEH Q1 – 10am , Passcode: 22074904
  • FCH Q1 – 12pm , Passcode: 28469900
  • BYI FQ3 – 430pm
  • EXPE Q1 – 430pm

Friday, May 2

  • April Employment Report
  • HT Q1 – 9am , Passcode: 1398938

Tuesday, May 6

  • RHP Q1 – 10am , Passcode: 25122491
  • SHO Q1 – 12pm
  • TRIP Q1 – 430pm


MGM – CEO Jim Murren was interviewed by the famous Robin Leach and the Las Vegas Sun regarding MGM's new tourism/guest venues/experiences along the Strip.  Murren promised "the transformation will grow to include all of his company’s properties on the Strip."  (Las Vegas Sun)

Takeaway:  Seems like an attempt to refocus the investment thesis away from room rate growth, which slows post Q1.  We remain skeptical of a sustained, v-shaped Las Vegas recovery. 


BEE – announced it closed a new $300.0 million stock secured credit facility with an accordion feature allowing for additional borrowing capacity up to $400.0 million. The facility's interest rate is based upon a leverage-based pricing grid ranging from LIBOR plus 175 basis points to LIBOR plus 250 basis points.  Initial pricing will be LIBOR plus 200 basis points, which is a reduction from the previous facility's pricing of LIBOR plus 275 basis points.  The facility has a four-year term with a one-year extension available to the Company. The facility is secured by an equity pledge in direct and indirect subsidiaries that own, lease or operate five of the company's assets: the Four Seasons Jackson Hole, Four Seasons Silicon Valley, Marriott Lincolnshire, Ritz-Carlton Half Moon Bay and Ritz-Carlton Laguna Niguel hotels.  Deutsche Bank Securities Inc. and JP Morgan Securities LLC served as Joint Lead Arrangers and Joint Book Running Managers for the facility.

Takeaway:  Similar capacity, modestly lower rate which reflect the company's overall improved balance sheet. 


NCLH – kicked off a five-day promotion on Hawaii sailings. The Hang Ten offer gives customers a $100 per cabin on-board spending credit when booking a seven-day voyage around the islands on the Pride of America. Customers get an additional $100 credit when signing on for a longer cruisetour.  The credits are in addition to air credits of up to $400 and military, Latitudes Rewards and AARP discounts that also are available on select sailings.

Takeaway:  Are Hawaii promotions heating up as well?



Around 350 thousand tourists to visit Macau during Labor Day holiday Macau News

According to Macau Government Tourist Office (MGTO) Director Maria Helena de Senna Fernandes, the number of tourists visiting Macau during the holiday period would be more or less the same as last year, adding even the number of hotel room reservations may increase during the holiday period, it will not be enormous. In 2013 a total of 342,000 tourists entered Macau over the Labor Day holiday (April 30 to May 2), according to official data.

Takeaway:  Golden Week is the prize anyway.


Macau Infrastructure - a new automobile tunnel, called Ka-Ho Tunnel, a project that will link the east of Cotai to the northeast tip of Coloane island - is expected to start in the third quarter of this year and last for at least 2 years. The tunnel construction project, which cost the project from over 254 million patacas (US$31.8 million) to about 540 million patacas. The proposed construction period ranges from 900 days to 930 days.  The two-way tunnel, comprising four lanes, will have its northern entrance start near the Rua da Central Térmica de Coloane in eastern Cotai. The tunnel will be connected to the area near Ka-Ho Port, the northeastern tip of Coloane island where Macau Oil Terminal and Macau Cement Manufacturing Co Ltd are located.

Takeaway:  As frustrating as the infrastructure delays have been, they are happening and should contribute to long term double digit Mass growth.


New Mexico Tribal Gaming -  The New Mexico Gaming Control Board reports that slots gambling at tribal casinos declined 0.1 percent last year compared to 2012.  Total tribal net win was $758.6 million in 2013 compared to $759.7 million the prior year.  The nine tribes and pueblos that have renegotiated their 2001 compacts pay the state between 3 percent and 9.75 percent of their net win.

Takeaway: Modestly better results than other jurisdictions but still flat and not positive growth. 


China Economic Growth - The International Monetary Fund raises its economic growth forecast for China but warns that its financial system faces risks due to the rapid expansion of debt. The IMF’s 0.3 percentage point increase to 7.5 percent in its growth outlook for China.

Takeaway: Surprising but not a negative.


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.

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