EYE ON POPULISM: Would this Vote Have Gone This Way Under the Employee Free Choice Act ?

At Research Edge we have our Eye on a potential Union comeback in this country. In a close vote, security guards at MGM's Mandalay Bay in Las Vegas voted against the International Union of Security, Police and Fire Professionals of America. Of course, consistent with our democratic traditions, the vote was conducted through the secret ballot. Obama and a majority in Congress have indicated they would pass the Employee Free Choice Act which would effectively replace the secret ballot with an open petition. My view is that union elections become less free under this measure and in this case the vote would've been radically different.

Todd Jordan
Managing Director

Gaming and Taxes: The Never Ending Battle

Boom or bust, State governments will continue to pump water from the spring, in this case extract tax dollars from their favorite well: the casino industry. There is a battle raging in Nevada on how to close the growing budget gap. The Teachers Union originally proposed a large increase in the gaming tax but compromised with some casino companies to offer an increase in the hotel tax. Terry Lanni, MGM CEO, opposes an increase in the hotel or gaming tax and suggested raising the payroll tax among other measures. Get used to this folks. Unfortunately, most state governments were unwilling to curtail spending growth during the most recent economic boon. With receipts likely going lower in many states, governments will need to find more revenue. We've watched this sitcom before and it's not very funny. If the gaming industry is already paying its fair share , its share is likely to get fairer. Whether it's Nevada, New Jersey, or the riverboat markets, someone's taxes are going higher. There is a break in the clouds, however. New markets are born out of the economic bust periods due to, you guessed it, the quest for new tax revenue sources.


First the good news: Las Vegas property level EBITDA margins have expanded 10 out of the last 15 years and were 4% higher in 2007 than the average over that period. The bad news: Mean Reversion is probably rearing its inevitable head. Why are we concerned about mean reversion? The impressive margin expansion was driven primarily by the hotel and the food and beverage product lines (casino margin has been stable) which should contract first and most dramatically as consumer spending slows and probably recedes. The following chart clearly shows the relevant trends.

In 2007, rooms and F&B contributed 40% of revenues and 38% of total departmental profits in Las Vegas, big contributors for sure. Room rates are already under pressure and casinos won't drop occupancy to hold rate. ADR's are the highest margin revenue source in Vegas. Do you see where I'm going? I'm not sure F&B traffic and pricing can hold up in this environment either. Restaurant traffic certainly hasn't across the country.

My partner Keith McCullough constantly reminds me that context is not just the last few years. Context in this case is at least 15 years. Unfortunately, when it comes to margin mean reversion, this context is not very comforting.

Todd Jordan
Managing Director

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CKR - CEO Responds to Shareholder Concerns

CKR dedicated a big portion of its presentation at its annual meeting today to addressing the concerns communicated in Ramius LLC's letter to CEO Andrew Puzder. To recount, the letter called for the company to:

1.) Significantly reduce operating costs
2.) Shrink the capital spending plan to improve free cash flow

Mr. Puzder stated that before his tenure as CEO began in FY01, that the prior management had significantly reduced G&A expenses (through substantial headcount reductions) on two separate occasions as management bonuses at the time were tied to G&A cost reduction targets. In FY01, as CEO, he had to make further cuts in G&A spending, resulting in a level of spending in FY04 that could not sustain the brand. In FY04, the $107 million G&A spend amount was the lowest it has been since he has been CEO. At that level, he said the company was in survival mode and that such spending could not be maintained without deteriorating the brand.

In FY08, the company's G&A expense was $144 million. Of the $37 million increase off of FY04's low level, he attributed $11.3 million to stock compensation expense (not included in G&A prior to FY07), $2.2 million to Sarbanes-Oxley expense, $12.1 million to inflation, $9.5 million to supporting growth and $1.9 million to unusual charges. Without all of these expenses, which I recognize as costs of doing business today, Mr. Puzder said G&A expenses would not have increased.

He also addressed Ramius' suggestion to consolidate CKR's headquarters, saying that the company has good lease rates on all three of its locations and that although the Anaheim rate is the highest of all three, that relocating the 328 employees that work there would not be cost effective. He did not mention, however, how much money the company could save from less flying time in the Cessna Citation X (please refer to my posting from June 17 for more details about that).

On a positive note, management did slightly lower its capital expenditure plans (down $54 million over the next 3 years) and reduced its new unit growth goals for Hardee's. Despite this welcomed reduction to only 7 new company-owned Hardee's units planned for FY09 (down from 12), Mr. Puzder also said that management will not speed up this growth until the right level of returns are achieved. While I agree with that investment decision, I think an even better decision would be to not build any new Hardee's until the proper level of returns can be achieved. In response to Ramius' suggestion to significantly reduce capital spending, management justified the need for new unit growth for both Carl's and Hardee's, saying that a successful concept must continue to grow in order to maintain its market share.

Although Ramius' letter did not mention any concerns about management compensation, I would have liked to hear management talk about why it has been so overpaid while shareholders have lost money, but I guess that will have to be a story for another day.

Gaining Confidence

Some very interesting call outs from NPD's footwear sales data this week. I'm liking what I see as it relates to my long FL, and short SKX and Adidas calls. UA and Nike continue to impress. Jordan is crushing it - notable in advance of Nike's quarter next week.

1) Trends continue to get better in US athletic footwear. Sales per NPD showed the best yy growth (5.7%) in 28 weeks. Average selling price accelerated (+4.4%), and while we've been seeing strength in ASP the key call out here is that it finally came simultaneous with (instead of at the expense of) unit growth.

2) Performance Footwear gaining share from Fashion. 'Low profile' was down 13%, versus an 8% boost for sports performance. NKE and UA are winning here, but I think it favors FL most of all. See my 5/28 analysis on FL for the deep dive. I still think that SKX and Reebok (Adidas) is a big loser with this theme.

3) Another little nugget supporting my negative Adidas call, as both the Adidas and Reebok brands continue to lose share meaningfully. Each brand is losing in excess of a point of share - pretty major on just an 8-9% combined base.

4) Under Armour's unit sales and pricing remain extremely solid - with both picking up sequentially. I'm increasingly impressed how they're managing this launch.

5) Nike's numbers look bullet-proof. Not only is the Nike brand still in aggressive share gain mode, but Jordan's yy share change went from negative territory early this year, to +3-4 points in recent weeks - with a strengthening price point.

People Need to Eat

The two pie charts pictured, which illustrate category spending as a percent of total personal consumption expenditures (PCE) for 2004 and 2008, led me to two conclusions: 1.) People need to eat and 2.) Casual dining operators are highly responsible for their current weakened condition.
  • As you can see in the charts, as energy, health care and housing costs have grown increasingly more expensive, they have eaten up a larger percentage of the consumer's spending. Over the same time period, however, food purchased at grocery stores and purchased meals and beverages have held relatively stable. Consumers are cutting back in other discretionary segments, such as autos and clothing/shoes, in order to maintain their ability to eat.
  • At first glance, I was surprised to see that the percent of the consumer's dollars allocated to dining out has stayed level at 7% relative to what we have all witnessed within the casual dining segment. Casual dining traffic trends have decelerated every year since 2004, turned negative in 2006 and have remained negative every month since February 2006. The disconnect between these two data points stems from the fact that the PCE trends do not account for the over supply of casual dining restaurants. Demand has remained at 7%, but supply (until just recently) has rapidly accelerated.
  • While people needing to eat has helped restaurants thus far even as consumers start to cut back on other discretionary purchases, consumer spending patterns could still get worse. As Keith McCullough pointed out on his portal yesterday, despite people thinking that the worst of the U.S. consumer has been discounted, U.S. consumer spending has remained positive for 64 consecutive quarters.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%