The restaurant industry continues to benefit from significantly lower commodity prices versus last year.  Chicken is the only commodity that we track that is relatively flat year over year; though the prices paid by some restaurant companies are higher year-over-year. 

Earlier this week, BWLD noted that the anticipated average price per pound of fresh chicken wings for July and August is $1.67 versus $1.17 for the third quarter last year.   If the third quarter averages $1.67 per pound, the company expects to see a 50 bps increase in COGS versus last year (similar to the YOY impact in 2Q).


Over the last two weeks, cheese prices have moved up 12%.  It should be noted that even after this significant move, cheese prices are -42% YOY quarter to date versus -40% in 1H09.  Cheese prices are still favorable on a YOY basis but are worth watching, given the big move.

On the 2Q CAKE earnings call, management commented that COGS benefited by a good 50-plus bps from lower commodity costs, largely non-contracted items, such as cheese and dairy.  Looking to 2H09, CAKE will likely benefit from the same trends, but that is obviously going to be dependent on what commodity costs do.


US Jobs: When Bad Is Good!

Since the US Dollar is the most dominant macro factor affecting US Dollar denominated stock and commodity prices, you can read this morning’s weekly jobs report as bad being good.

When is bad good? Well, when initial claims come in at 584,000 versus last week’s 559,000 AND climbs above the 4-week moving average (see chart), AND the stock market rips higher… I call that a bad jobs number being good.

Obviously a lot of people still look at the US stock market in a vacuum and those people won’t agree with my conclusion. That’s fine. That’s what makes a market. The New Reality of a country that devalues remains: what’s bad for the US Dollar is good for assets priced in dollars.

The US Dollar is down on the day – stocks and commodities are up. The longer Bernanke can justify this ridiculous “emergency Great Depression” policy of ZERO interest rates with negative (and lagging) economic data, the longer this REFLATION game carries on…

This won’t end well. But neither has this week for the short sellers of everything rear-view mirror.


Keith R. McCullough
Chief Executive Officer

US Jobs: When Bad Is Good! - a1

Eye on the Baltic Dry Index

“I have no friends and no enemies - only competitors.”

          -Aristotle Onassis

We’ve had our eyes on the Baltic Dry Index, which has had a massive rally year-to-date and over the last three months.  The BDI is one of the best proxies for global demand as it signals the increase in demand for cargo containers.  As shippers require more containers, simple supply and demand dictates that the price for those containers will commensurately increase.  The quote from the now deceased shipping magnate, Aristotle Onassis, explains this relationship directly.  Shipping is a highly competitive industry, so rates for shipping are very sensitive to increases and decreases in economic activity. 

The Baltic Dry Index, in particular, is very relevant.  As was recently written in Slate, “because dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel, and food, the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity.”  Further, “because it provides an assessment of the price of moving the major raw materials by sea, it provides both a rare window into the highly opaque and diffuse shipping market and an accurate barometer of the volume of global trade -- devoid of political and other agenda concerns."

The important takeaway form the move we have seen in the BDI year-to-date (outlined in the chart below), which has also been echoed by the prices of copper and related commodities, is that this economic resurgence we are seeing in the prices of commodities globally is not illusory. There has been a real and sustainable pickup in demand for basic industrial inputs on a global basis.  China has obviously been a key driver of the pickup in shipping rates, as Andrew Barber discussed in detail in his recent China Black Book.  Specifically, China has imported an estimated 297 million tons of iron ore in the first half of 2009.

While the price move of the index verifies what we already know, the question remains, what is the BDI telling us about the future?  We are seeing certain rates decline over the last week, which may suggest that we are seeing a bit of a summer slowdown.  Some strategists are suggesting that we will see a serious decline in economic activity from China in the upcoming quarters.  We currently do not hold this view, but will be watching the BDI as an indicator for continued demand from China for materials needed to continue its furious infrastructure building activity.

Daryl G. Jones

Managing Director

Eye on the Baltic Dry Index - a1

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Hawaii just eliminated the ability for residents to offset gambling winnings with their losses. Fair or not, BYD’s downtown properties may take a small hit.


A state law eliminating the gambling loss deduction was signed into law retroactive to January 1st.  Similar to every other state and the federal government, Hawaiian tax law had allowed taxpayers to deduct gambling losses on their tax return up to the amount of gambling winnings.  Now, Hawaiians will be taxed on gross winnings.  So if Governor Linda Lingle played five hands at BYD’s Freemont Hotel & Casino and won 4 straight hands of $25, but bet the entire $100 winnings on the fifth hand and lost, she would still owe state taxes on $100 of income. 

Practically, the legislation will have little impact on the gambling tendencies of most Hawaiian visitors to Las Vegas.  With the exception of politicians – we know they are all honest – most gamblers are not reporting their gambling activity any way. 

BYD generates a little over 10% of its property EBITDA from its downtown properties.  We estimate that roughly half of the downtown EBITDA is generated from Hawaiian visitors.  State documents indicate that only $5 million of gambling losses were deducted from individual tax returns last year so we are not exactly talking about huge dollars here.  However, don’t be surprised to see a little weakness downtown in what has been a surprisingly strong market for BYD.



30 JULY 2009



It’s that time of year again where everyone boards that flight to Vegas to hear all the ‘powers that be’ in the footwear business pump their chests at the World Shoe Association (WSA) Show (which starts tonight). At trade shows and conferences earlier this year, it was as if every company read off the same script…”We’re keeping inventories tight, cutting SG&A, taking down growth capex, and managing for margin, blah blah blah…” I think we’re going to see a meaningful change this time around. There will be two main themes. 1) Distribution – especially given the recent AMZN/Zappos deal, and 2) Sourcing costs, and who keeps the savings. We’ve hit on the sourcing issue ad nauseum over the past six months. Unfortunately I still think that the industry at large still does not understand who will actually keep the sourcing savings. More on that later. For now let me touch on Distribution, as we’ve met with several management teams this week to discuss the issue.

1) First off, did anyone notice that on the same day as the Zappos deal, Charming Shoppes announced that it would be closing While Zappos is marginally profitable, public companies (i.e. BWS and CHRS) have had a difficult time making money with online shoe businesses largely due to the challenging variable cost structure – namely affiliate marketing and distribution costs (free shipping and returns).  This is best evidenced by Brown Shoe (BWS), which owns This should be the Mother Lode trademark for online footwear retailing. Unfortunately, the company has yet to print a red cent of profit in that division.  In what I’d consider a poor attempt to turn a frown upside down, BWS noted that a potential positive is if AMZN decides that it does not like Zappos’ strategy of paying for product returns, then it would be a massive donor of market share. The funny thing here is that if BWS picked up this share, it would be an incremental negative to cash flow given the margin structure of the division. 

2) Yesterday we visited Payless at the company’s HQ. Among many other topics, we discussed distribution. Matt Rubell was clearly more grounded in his view of this deal. Aside from commenting on the stratospheric nature of the $847mm price tag, Matt noted several important points. 1) PSS will likely need to make more custom product in its wholesale brands with Zappos as a larger customer. 2) This deal highlights the need for Payless to go more consumer-direct, which it had already planned to do this fall with 4x growth in direct marketing spend now that it has 4 years worth of data from which to harvest. This equates to a focus not only on getting more customers in the stores, but more importantly getting the right customers in the store. 3) The company has also invested in 1 platform and infrastructure system for it’s .com initiative. This is in its infancy, but it sounds to me like the ante just went up. 4) In its direct marketing effort, PSS will go out with an $8.99 entry level price point for back-to-school, which will be its lowest advertised price point ever. The shoes in question were reverse engineered to go out at the same margin (or higher) as a higher price point shoe.

3) New FL CEO Ken Hicks starts his job on Aug 17. Do you think that just MAYBE we should begin to discount the possibility of him making comments at WSA about his view on .com and on the strategic implications of Amazon/Zappos? Whether he’s right or wrong, the fact is that he is big.

4) It’s clear to us to be competitive in the space you can either build or buy.  Most companies have built, but with a brick and mortar mentality.  Assets born out of the .com era and not 7th Avenue are likely to be more flexible, innovative, and creative.  Moreover, online only operations are likely to have been built at a lower cost than companies that have built direct businesses as “add-ons” or “extensions” of core legacy operations. We’ve mentioned Gilt Groupe a few times and whether an IPO is imminent or an outright sale, this is another great example of an old model (off-price), with a new twist (limited time sales, online only).  The private companies with prominent brands but little presence on the Street cannot be ignored.

Lastly, and most importantly, here are some thoughts from our Tech Sector Head, Rebecca Runkle, on Amazon.

1) Bullish on Internet, broadly speaking – think mobility is not yet understood both in breadth and depth of opportunity.

     a) Amazon’s mobile opportunity is massive… ubiquitous Internet is great for someone that owns online ecommerce.

     b) In other words, as the utility function of online retailing increases, brick and mortar retailing decreases…Amazon wins.

 2) Amazon has multiple ways to win – first party retail, third party retail and cloud computing are the three major legs.

     a) First Party Retail – as with the Zappos acquisition, Amazon will build out its direct-fulfillment infrastructure into new  categories and increasingly own major categories on the Web.  It will make/buy categories that it can leverage against its scale to drive value.

     b) Third Party Retail – Amazon will be a maker of Kings by enabling smaller parties with unique/differentiated merchandise to leverage the Amazon brand/platform.

     c) Back-end cloud compute ecosystem – Amazon web services.  This is the least understood and one of the most long-tail opportunities for the company.  They have a massive back end that they are proactively leveraging and in so doing enable entrepreneurs to create businesses at low cost.  This capability should continue to scale and grow and positions Amazon as a strategic service provider long term.



Some Notable Call Outs

- Carter’s solid 2Q results stand out as one of the few companies truly exceeding expectations for the right reasons. Interestingly, the strength in sales and margins is allowing management to take a slightly longer-term view of the business in an effort to sustain profitable growth. On the company’s conference call, management stated that it will strategically invest the upside from its strong 1H performance in key areas including: improving the product offering, enhancing in-store brand presentation, and marketing. The company also announced it is taking its capex budget up slightly for the year. We know that companies can still make EPS by cutting to the bone, but there are limited examples of companies like CRI that are actually setting up for sustained profit growth in 2010.

- Hidden amongst the disappointing results for TBL, was a some positive commentary on the brand’s licensing partnership with PVH. While the environment for men’s apparel is tough in general, PVH/Timberland is expanding its door count for the fall with its key distribution partner, Macy’s. CEO Swartz also went on to explain that being in a partnership with PVH is producing a product and business far better than TBL could have achieved on its own.

- In another sign that the environment still has low visibility, Hanes Brands highlighted that its retail partners are waiting to see how back to school sales progress before committing to promotional programs for the holiday season. Historically, those programs would be locked up by now and commitments would be firmly in place. We continue to see the “wait and see” approach as well as compressed lead times permeate both the footwear and apparel sectors.

- JNY is seeing very favorable results from its massive store closing efforts. As a result the company increased the number of stores it expects to close by the end of 2010 from 225 to 240. Additionally, the savings related to these efforts are coming in slightly ahead of expectations. With the bulk of the closures coming in the mall, the resulting store portfolio will be about 70% outlet locations when the process Is complete.

- Twitter is becoming a household name in the media and certainly in the tech world. However, it is now making its way into quarterly conference call recaps. JNY’s CEO mentioned that Twitter, Facebook, and other social media sites will be used to promote the company’s launch of Rachel Roy for Macy’s. Expect to hear more of this type of effort from other brands aiming to target a youthful demographic in more cost effective and direct ways. The interesting byproduct of this type of marketing lies in the real-time feedback a company or brand receives when they reach out and “talk” to their consumers directly on their Facebook pages or via their Twitter accounts.



- Beige Book indicates slight improvement but incredibly price conscious consumers - Retailers continued to adapt to a “price conscious” consumer across the country, as sales moderated slightly in June and early July, according to the Federal Reserve Board’s Beige Book released Wednesday.  Anecdotal accounts in the report, which provides a snapshot of economic activity in 12 regions in the U.S., seemed to indicate some stabilization in the overall economy. Retailers in the Boston, Kansas City and San Francisco districts reported modest sales increases, while merchants in Philadelphia, Atlanta, St. Louis, New York and Dallas had flat or mixed sales results. Sales continued to decline in Cleveland, Richmond and Minneapolis. “Consumers focused on purchasing less-expensive necessities, while sales of big ticket items languished,” the Fed reported. Despite some positive sales results, retailers in most regions were preparing for a poor back-to-school season and planned to trim back inventory levels. Merchants in New York, which had been lagging behind the rest of the region in retail sales, reported an overall uptick in sales in the period, although levels were 8 to 10 percent below the comparable period last year. One major retail chain in New York said moderate-priced lines were selling better than premium or lower-priced ones. <>

- Adidas toughens leather sourcing rules - Sportswear giant Adidas has followed its rival Nike to toughen its leather sourcing rules in response to Greenpeace's claims. The German company said it had asked its Brazilian suppliers to put in place a system to prove that all leather is sourced from cattle outside the Amazon Biome by July 1 2010. Suppliers will also be asked only to source cattle from legal farms in the area; only to source hides from cattle raised outside the Amazon Biome; and not to source hides from cattle farmed on land disputed by indigenous groups. The company said it also expected suppliers to source cattle from farms signed up to Brazil's National Pact on the Eradication of Slave Labour, supported by the International Labour Organisation. Any suppliers listed by Brazil's Ministry of Labour and Employment as being involved with employing slave labour on farms would be suspended immediately. The company will work with the Leather Working Group to develop a traceability protocol to implement these objectives. <>

- Pakistan's hosiery exports hit by domestic issues - Pakistan's once booming hosiery exports have been slowed down by local issues of the electric power shortage and unrest social situation. Industry experts pointed out that it was these local problems that led to untimely delivery of orders rather than the global financial crisis. Overseas buying houses of the major hosiery markets were only willing to place orders provided that goods could be dispatched on time, which could not be guaranteed under the current circumstances. In this light, hosiery manufacturers in Pakistan have now been trying to divert products to neighbouring countries such as India, Bangladesh and China. <>

- Recap of the Denim Industry and its major players - The $13 billion denim industry — a life preserver for the sinking apparel industry the past year — may be fraying at the high end of its product line. While old standbys including Levi's, Lee and Wrangler are still seeing sales increases that likely will continue in the coming year, sales increases for pricey premium jeans will likely occur only in the under-$200 category, according to market research firm NPD Group. But really pricey denim pants may be falling out of fashion. The superpremium jean business has dropped off tremendously because the inspirational shoppers aren't going up that high, and luxury customers aren't buying two or three pairs anymore." Gap plans to take advantage of the downscaling of denim next month when it introduces a $60 line of what it says are great-fitting jeans designed in part by hires from premium jean companies. Gap, which says denim is its "birthright," is celebrating its 40th anniversary by launching a collection that builds on its expertise, as well as that of designers it has hired away from companies including Joe's and Earl. "Our goal is to build jeans every bit as good as any premium player," says Gap spokeswoman Louise Callagy. Gap, which lost many middle-age female customers when its pants went too low-cut several years ago, will offer seven different "fits" for men and seven for women. True Religion says it isn't going to shift its strategy. Lucky, which sells jeans from $99 to $139, is well-positioned for the downturn, says Bill McComb, CEO of Liz Claiborne, which owns Lucky, because it isn't selling at the upper reaches of denim. The company also got a jump-start on competitors by opening specialty shops, where it can control its promotions and displays. But, as with 7 for All Mankind and True Religion's stand-alone stores, Lucky often finds it has to compete with department stores, which are discounting their jeans faster than they'd like. Privately held premium-denim company Citizens of Humanity doesn't release sales numbers but, "Our business is not what it was last year," says Chief Operating Officer Gary Freedman. Still, he says, it's better than expected, and the company hopes to steal more sales with its recent introduction of "super stretch denim." Like its competitors, Citizens is expanding beyond denim. It will offer knit tops for the holiday season, allowing "our customer base to buy Citizens of Humanity products at a lower price." Levi Strauss and VF's Lee and Wrangler brands, while affected by the economy, are weathering it better than some at the highest ends. <>

- PLCE Ex-CEO drops proxy fight - The former chief executive of Children's Place Retail Stores Inc. abandoned his proxy fight two days before a stockholder vote, agreeing to sell half of his stake to the company. Ezra Dabah ended a fight to place three dissident directors on the board of the children's apparel and accessories retailer. The company agreed to buy 2.45 million shares of his shares for $70.8 million. Mr. Dabah said he would resign from the board upon the sale of the shares. Stanley Silverstein, Mr. Dabah's father-in-law and the company's second-largest individual shareholder after Mr. Dabah, also agreed to resign from the board. A spokesman for Mr. Dabah declined to comment. Four proxy advisory firms had issued recommendations siding with the Secaucus, N.J., company in the proxy battle. RiskMetrics Group said shareholders had benefited from current management. Mr. Dabah left his post as chief executive of Children's Place in September 2007 at the request of the board. He tried to buy the company in 2008 and launched his proxy fight after financing for a deal fell through. Those three board seats, in addition to his own seat and that of his father-in-law, would have given Mr. Dabah control over the company. <>

- Boscov’s Inc. appeared to clear the final hurdle in its battle to emerge from Chapter 11 - Boscov's may be in family hands after freeholders in Atlantic County, N.J., voted 7 to 2 in favor of guaranteeing $1 million under the federal government’s Section 108 loan program. Boscov’s needed Atlantic County to cap the $300 million package of government loans and private equity required to seal emergence from Chapter 11 bankruptcy. That was backed since December by a combined $200 million credit line from Bank of America, Wells Fargo, GE Finance and CIT. It also includes $53 million from the Boscov and Lakin families and $35 million from the state of Pennsylvania, where Boscov employs 5,000 out of a total of about 9,000. <>

- Apparel vendors felt the sting of a slower economy very directly in 2008 — Lower profits dragged down the compensation of top industry executives by a total of 25.6% last year, and a few even elected to forgo some bonus money as they made tough decisions that often translated into smaller head counts. The double-digit percentage decline was greater than the 9.4% decline in the top 10 retail paychecks. It was the largest decrease in the past five years as the recession extracted a toll on stock and option awards. Here are the top 10:  1) Ralph Lauren Chairman and CEO of RL $20.3, 2) Roger N. Farah President and COO of RL $14.1, 3) Richard A. Noll Chairman and CEO of Hanesbrands $9.28, 4) Neil Cole Chairman, President and CEO of Iconix $9, 5) Jeffrey Lubell CEO True Religion $7.7, 6) Mark G. Parker President and CEO of Nike $7.3, 7) Joseph R. Gromek President and CEO of Warnaco $6.4, 8) Eric C. Wiseman CEO VFC $6.2, 9) Charles Denson President of Nike Brand $6.9, 10) William McComb CEO LIZ $5.5. <>

- LIZ's Mexx Worldwide hired three new top executives - In an effort to build its Mexx Worldwide business, Liz Claiborne Inc. has hired three top executives, all starting on Nov. 1. Two of the executives come from Esprit, where Mexx’s incoming chief executive officer, Thomas Grote, was most recently president of the Esprit brand and a 15-year veteran of the firm. Volker Schmidt will join as global head of wholesale development and vice president of region 2. Schmidt will be responsible for the Amsterdam-based company’s global wholesale business development in Germany, Austria, Switzerland and the Nordic countries. Schmidt most recently was senior vice president and head of partnership sales at Esprit. Prior to joining Esprit 16 years ago, Schmidt held a variety of sales positions at firms such as In-Wear and Mustang Jeans Group. Jim Nowak will join Mexx as global head of product overseeing all Mexx product divisions including accountability for the line’s pricing structure, assortment planning and product design. Most recently, Nowak was senior vice president, head of Esprit Casual, where he set global strategy for all of the brand’s casual lines. A 20-year veteran of the apparel industry, he spent the last nine years working with product in various divisions within Esprit, including EDC, women’s and men’s casual and kids. Knut Burgdorf will join Mexx as vice president of marketing. He will be responsible for all brand marketing activity, from creative to production. Previously, Burgdorf worked with TBWA, a marketing and advertising firm with such clients as Apple, McDonald’s and Adidas. <>

- Wicked Fashions launches skate clothes line at JCP - Wicked Fashions is launching its first celebrity clothing line at JCPenney this Friday, in partnership with teenage pro-skateboarder and reality TV star Ryan Sheckler. The new line, RS by Sheckler, will include t-shirts, jeans, hooded sweatshirts and other apparel for boys and young men ages 12-24. It will also be available at other retail stores nationwide. The campaign, which was developed by Wicked Fashions’ marketing department and Sheckler’s management team, targets mostly young people “who want to be like Ryan,” said Janice Welles, director of marketing and advertising for Wicked Fashions.  <>

- The Home Depot targets cost-conscious consumers with a savings center - The down economy is leading more homeowners to do more do-it-yourself home upgrades. Since launching a savings center in March, The Home Depot says discounts and low prices have led to nearly $410 million in savings for shoppers so far.  <>

- Apparel merchants led in response time in June - For the second consecutive month, apparel and accessories merchants delivered the best response time to shoppers with a high broadband connection, says Gomez Inc. Shoppers with a high broadband connection in June could visit an apparel retail web site in an average time of 6.02 seconds, Gomez says, compared with mass merchants (6.73), computers and electronics retailers (6.74 seconds), and specialty merchants (8.02). When a site is accessed by a low broadband connection, mass merchants provided the fastest average access at 22.03 seconds, Gomez says. The next fastest web retailing category for low broadband response time was apparel and accessories merchants at 22.47 seconds, followed by computers and electronics retailers at 23.18 seconds. <>

- Twenty Sears stores are expected to open in-store toy shops next month - According to published reports, the toy shop locations include six in Los Angeles, four in San Francisco, three in the New York metropolitan area and seven in the Chicago area. Sears is not a rookie to the toy market, having published the iconic Christmas Wish Book and, in 2001, launched a holiday store-within-a-store concept with KB Toys. <>


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): AMZN

07/29/2009 03:32 PM


Runkle has had me waiting in the weeds to buy AMZN. Its down again today and this is a solid level to get involved. No, her thesis isn't based on the Fast Money Kindle! KM




  • Steven Schneider, President & COO, sold 12,500shs ($109k) after exercising 12,500 options less than 10% of common holdings.
  • Glenn Lyon, CEO, sold 40,000shs ($436k) after exercising 40,000 options less than 30% of common holdings.

VFC: Candace Cummings, VP Admin & General Counsel, sold 20,000shs ($1.3mm) after exercising the right to buy 20,000shs approximately 50% of total common holdings.

NKE: Eric Sprunk, Vice President, sold 4,058shs ($221k) roughly 10% of common holdings pursuant to 10b5-1 plan.







The Galaxy call was fairly optimistic (when is it not?). Most of the issues we see are on the Mass Market side – supply growth and discounting – which shouldn’t affect the VIP centric Starworld much.


Galaxy 2Q09 Earnings call:

  • Improving but more competitive Macau market
  • Continuing with the development of Galaxy Cotai but at a slower pace
  • Added 16 VIP tables in June and 6 more in July at Starworld
  • 50% of their Mass table area was closed during the quarter due to renovations
  • Cotai shell is due to completed end of 2009 and will align the opening with a recovery in the market
  • Maintained 12% market share in Q2 in the face of supply growth
  • Annualized ROI of 26%
  • Net cash positive at end of June, retired $250MM of debt at .50 on the dollar
  • Confident that they can deliver the $200MM of operational efficiencies that they have already announced



  • Did have 50% of the Mass gaming floor out of operations for at least 50% of the quarter
  • Very diligently managing their costs
  • Are they able to take on additional debt under their current credit agreements?
    • At the corporate level there are no restrictions think they need to get lender approval
    • Doesn’t sound like they have an issue here
  • Seeing positive trends in Cotai with the opening of City of Dreams – gaining critical mass needed to succeed
  • Commission Caps?
    • “Momentous occasion” the commission cap has been on the table for over a year.  They are cautiously optimistic that there will be a cap implemented by year end
    • Don’t think it will have a large impact on VIP volumes
    • We remain skeptical that the y will be enforced and are concerned with the number of loop holes – more on that later
  • How do they feel about 2010?
    • Fairly positive
  • Any other trends they can highlight?
    • VIP volumes were up around 10% in the 2Q
    • July was pretty solid as well
    • Added 6 new tables in July and relaunched the Mass gaming area this past Sunday
  • Cotai Project – remaining capex?
    • Spent HK$4BN already, have another HK$1-1.5BN left for 2009 and then another HK$4BN
    • Leverage post project will be 35-40%, and should decline once the property gets up and running
  • Mass Market strategy
    • Cash rebate programs are very competitive with the market – we are concerned with the potential for shrinking Mass Market margins
    • Volumes in July are pretty healthy
    • June was the best month for VIP volume
  • Starworld ROI – 26%, hope high teens ROI at the Cotai project and eventually break 20%
  • Tax gain was from the bond buyback – HK$800MM ($100MM US)
  • Areas for operational improvement, future for the company/ strategic direction
    • Pleased with the new marketing programs
    • Working on efficiencies
    • Focused on opening an “Asian Centric” Cotai resort
  • Will be prudent and opportunistic with debt buyback now that the paper is trading in the 90s
  • May & June visitation numbers have been very weak, despite decent revenues
    • Hasn’t affected them as much because they are VIP focused
    • Once they  re-opened, the majority of the Mass space their visitation has improved
  • Bank debt: only a few hundred million HK
  • Restatement of Mass and VIP revenues in their reporting
    • Reporting is consistent with the way they pay their commission and the DICJ practice
  • Where is the cash coming from on their balance sheet?
    • Working capital –have had inflows/deposits from new VIP room junkets
  • How will the HK$5.4BN of cash on hand be spent?
    • Mostly on Cotai – another HK$5-5.5BN to spend
    • Construction materials / city clubs/ Starworld cash flow will help fund that
    • Not unreasonable to think that they will do a new debt offering in the future given the recent repurchases - Will be opportunistic – but have no plans for a buyback right now
  • VIP/ Mass split with the capacity additions:
    • VIP – 140
    • Mass- 100
  • Cotai – spend about HK$300-400MM in 1Q09 and a few hundred MM in 2Q09
  • City Club- Declining EBITDA contribution – reorganized the business – they switched from a profit share to a top line agreement – they actually lost money in the 2H08. Think they will contribute around HK$100MM per year
  • Lots of questions on where all the cash balances came from – VIP promoter deposits and R/C draw as well…  Cash balances will obviously decrease going forward as they develop Cotai
  • Bank debt – was HK$200-300MM … now they repaid it.  I don’t understand why they just don’t disclose their debt balances – ie net cash
  • Seeing HK$50MM per quarter of savings
    • Starworld focused on managing labor and marketing.
    • Reducing work week from 48 to 40 hours. 
    • Directing investment of marketing more productively
  •  The commission cap will definitely benefit their margins, commission caps are north of 1.25% now
  • VIP volumes aren’t growing so why is everyone so upbeat?
    • Added 16 tables in June and another 6 in July
    • Over time- visa restrictions, swine flu, economy… just feels better


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