The Economic Data calendar for the week of the 28th of July through the 1st of August is full of critical releases and events. Attached below is a snapshot of some of the headline numbers that we will be focused on.
Takeaway: 2H14 is when YELP’s fundamentals start showing signs of deterioration, 2015 is when the street realizes the business model is flawed
We’re not expecting too much upside to consensus 2Q14 estimates. We're expecting revenue of $86.7M vs. consensus of $86.3M. Continued commodity cost pressure will not only impact attrition, but makes for a tougher selling environment as well. If YELP beats consensus revenues, it would likely be driven more by its Brand Advertising and Other segments, than Local Advertising, which is the focus of our short thesis (~85% of revenue).
However, we don’t care about 2Q14 results outside of the incremental data we get from the reported metrics. Our short thesis is focused on the TAIL duration: 2H14 is when YELP’s fundamentals start showing signs of deterioration, 2015 is when the street realizes the business model is flawed.
As we move into the back of the 2014, YELP’s attrition will accelerate simply because it has more accounts, regardless of the attrition rate itself (e.g. the 12K accounts YELP lost in 1Q14 = ~1/3 of the total accounts it lost in all of 2013). So, in order to drive the type of growth that both consensus and management are expecting in 2H14, YELP's salesforce would need to produce accelerating new account growth through the remainder of 2014, or YELP must curb attrition to historically rates...YELP's 1Q14 results suggest it is off to a bad start already, which means it must pick up the pace on both fronts. In 2015, YELP would need to produce BOTH of the above (and that’s based on consensus 2014 estimates).
We don't know how management will approach guidance. We thought the 2014 guidance raise on its 1Q14 release was a rash move to buoy a stock that was approaching YTD lows at the time; especially since the raise was weighted toward 2H14 (see above). We believe the raise is more of a bet on its aggressive sales rep hires than any measure of visibility, which is inherently limited by its attrition issues.
Post the guidance raise in 1Q14, management has fewer options to work with. Management could choose to play it safe, and only raise guidance by its 2Q upside (if any), which may not be enough to satisfy the street. Or, it could raise guidance again, and just hope for the best. The latter will just create a higher hurdle, particularly for 2015, as consensus tends to raise outer-year estimates more than current year on good news. In turn, the expected growth rate in 2015 climbs in response.
The ongoing hurdle for YELP is it’s account base because of its attrition issues. As YELP’s account base grows, it’s attrition risk grows with it, and YELP must continually add more sales reps in order to drive enough new account growth to compensate. That’s YELP’s business model
Let’s just say we’re wrong about 2014, and YELP knocks the cover off the ball and crushes numbers. All that means is the setup for 2015 will be that much more challenging. The more accounts YELP enters 2015 with, the larger the hurdle, the lower its future growth. This is the sad truth of any business model riddled by rampant attrition.
Let us know if you have any questions, or would like to discuss in more detail
Hesham Shaaban, CFA
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Takeaway: SIGMA review for companies reporting earnings this week. Carter’s looks the most troublesome – esp rel to sentiment/valuation.
SIGMA REVIEW: Here are the SIGMAs for the eight retail-related companies that reported earnings this week. There are no clear trends within the group in aggregate, but there are some interesting callouts.
AMZN - 2Q14 Earnings
DECK - 1Q15 Earnings
COLM - 2Q14 Earnings
UA - 2Q14 Earnings
CRI - 2Q14 Earnings
HBI - 2Q14 Earnings
SKX - 2Q14 Earnings
CAB - 2Q14 Earnings
DECK 1Q15 Earnings
Takeaway: Weak guide - taking top line expectations up by $15.5mil ($20mil beat in the Q) and EPS up a nickel after blowing away numbers by $0.22. Coming out of the quarter inventories look healthy and that almost always sets up favorably for a positive Gross Margin event, but that will be offset by SG&A deleverage as the company adds another 30-35 units on to its existing base of 117. The question we have for DECK is - why continue the square footage growth when retail concepts have been unable to comp at the store level (-2.8% CY on top of a -5.3% LY)? We don't buy the store and e-commerce symbiosis argument. This is a company that does over a $1bil wholesale…it's not like it has an awareness problem. Instead of opening singularly focused retail concepts, why not roll half that cash into a killer e-commerce site to leverage the awareness offered by wholesale partners.
WMT - Walmart Names Greg Foran President and CEO of Walmart U.S.
Takeaway: For a more detailed recap on our thoughts on Simon's departure and how it relates to TGT see our note from last night titled TGT: 1.0 vs. 2.0. Link - CLICK HERE
TGT - First TargetExpress opens its doors in Dinkytown near U
Takeaway: TGT's answer to WMT's Neighborhood Markets and Express Stores. TGT Express stores = 1, WMT small format stores = 370. We give the company credit for testing this new prototype. Something it's been slow to do in the past. But, in order for TGT to succeed it needs to redefine its place in the marketplace not chase the 800lb gorilla that is WMT.
JWN - Nordstrom Hiring 400 Staff, Including 30 Managers, for 2nd Canadian Store
Vineyard Vines Unveiling NYC Unit
Tickers: BYI, BYD, ISLE, PNK
BYD – announced it appointed Chris Gibase to the newly created position of Senior Vice President and Chief Marketing Officer. Gibase will direct all of Boyd Gaming's marketing functions, including digital and print media, advertising, B Connected, E-Commerce and event marketing. Boyd Gaming also announced that it has named two executives – Steve Schutte and Vince Schwartz – to the position of Senior Vice President, Operations. Schutte will have day-to-day oversight of four properties – Diamond Jo Casino, Diamond Jo Worth, Sam's Town Shreveport and Sam's Town Tunica. Schwartz will be responsible for the operations of three properties – the IP, Treasure Chest. Gibase, Bogich, Schwartz and Schutte will report directly to Paul Chakmak, Executive Vice President and Chief Operating Officer. and Amelia Belle
Takeaway: BYD senior management needs to cut SG&A, not increase overhead.
27:HK Galaxy – launched the "World Baccarat Master of Macau" baccarat tournament featuring a total prize pool of HKD41 million. The eight month tournament offers monthly qualifying tournaments and will culminate with the Master Championship Tournament in April 2015 with a top prize of HKD 5million and a champion's diamond ring. Galaxy also plans other "World Master" events including a World Slot Master of Macau tournament.
Takeaway: Galaxy providing strong marketing and promotions programming to help generate interest in Galaxy Macau and thus drive GGR growth.
GENK:MK – Genting Bhd is rumored to file a bid to operate a casino at Spain’s BCN World. Genting could be one of the bidders for one of the six casino licenses to be issued for the project. Today was the deadline to present a bid. Each casino licensee would have to invest a minimum of EUR300 million (US$403 million) in BCN World.
Takeaway: Building a global gaming empire one market at a time. Better hope the gaming tax rate is very low.
GTK:IM – GTech Canada, a unit of Italian GTech SpA, won a contract to provide its Intelligen VLT information system to Greek lottery operator OPAP SA. GTech is expected to connect its system to OPAP and concessionaire VLTs beginning in late 2014, following system certification by the Hellenic Gaming Commission. GTech said it was chosen from among four vendors in an open procurement process to provide the system “to monitor and control up to 35,000 VLTs in OPAP’s planned new network”.
GTECH has signed a seven-year contract with the Tennessee Lottery which it expects to yield $130 million in total revenue. Under the deal, a unit of GTECH will provide new lottery systems and related services starting from April 2015. The contract could be renewed for another seven years after that.
Takeaway: Two nice wins for GTECH
ISLE – Chief Legal Officer, Edmund Quantmann sold 5,870 shares of ISLE stock via a 10b5-1 sale on Tuesday, July 22nd at an average price of $8.22 and now owns 68,302 shares of stock.
BYI – announced a contract to provide systems, including its iVIEW DM picture-in-picture technology and business intelligence software, to connect the 3,100 slot machines at the Muckleshoot casino in Washington.
PNK – Orange Capital again calls for PNK to split into an OpCo/PropCo REIT. Orange believes such a transaction would result in shareholder value of $35 to $42. Orange noted how the firm is "unsatisfied with the (PNK) company's response to date."
Takeaway: Given our work and analysis in the gaming REIT conversion area, we doubt the potential value creation as outlined by Orange. We further believe a tax-free spin-off is NOT an option available to PNK.
IMF Speaks Out on Macau – The IMF executive board commended the Macau authorities’ focus on promoting non-gaming services, and encouraged them to explore more opportunities, including via broader integration with mainland China, further financial development and greater public investments in infrastructure and human capital. The IMF also encouraged the Macau officials to introduce more anti-money laundering measures to safeguard integrity in the gaming sector, in particular to “bolster customer due diligence requirements” in line with international standards and “to strengthen oversight of all market players, including junket promoters and their associates”.
Takeaway: Where was this advice five years ago?
Macau Airline Service – Macau International Airport Co Ltd is considering launching new routes to the northern cities of Xian (Shaanxi province) and Shijiazhuang (Hebei province) in the coming months and is in talks with airlines regarding the new service, including Air Macau. Also, later this year Xiamen Airlines will initiate new direct service linking Macau and Tianjin.
Takeaway: Helping the gaming operators reach further into the outlying provinces for new gamblers.
UnionPay – UnionPay International announced that overseas consumption by Hong Kong and Macau UnionPay card-holders increased by 49% YoY in 1Q 2014. A total of some 15 million UnionPay cards have been issued in the two Special Administrative Regions. The compound annual growth rate of UnionPay transactions rose by more than 64% and the local card issuing business jumped by almost 100%, doubling the number of cards issued to clients. UnionPay's business in Hong Kong and Macau has been developing as the fastest districts outside mainland China since the company launched its business in the two Special Administrative Regions in 2004. Finally, the number of the company’s cooperating merchants in the two regions has increased 7.6-fold over that of 10 years ago.
Takeaway: Just when the UnionPay money laundering headlines were going away, the Company gives regulators more food for thought.
BCN World – The BCN World project threatens to follow in the footsteps of Sheldon Adelson failed EuroVegas. BCN World's main promoter, businessman Enrique Banuelos, requested an adjournment to purchase the land where the new complex will sit. According to local media reports, Veremonte, the investment vehicle of known Valencian businessman, signed a contract with La Caixa to secure a preemptive purchase of Lumine Mediterranean Beach & Golf Community, a subsidiary of the Barcelona bank which also owns the land adjacent to Port-Aventura. However, that contract expires next Wednesday and Banuelos has no liquidity to pay 377 million euros to complete the acquisition. Thus, Banuelos asked the bank to modify the conditions of the agreement and delay closing until December 31. La Caixa accept the postponement, but instead modify its acquisition conditions, as a price increase.
Takeaway: BCN World is not actually located in Barcelona but rather about 70 miles down southwest of Barcelona, between Salou and Tarragona Spain
SugarHouse Casino Expansion – SugarHouse casino, located near the Delaware River in Philadelphia, broke ground on a $164 million expansion. The expansion, which is expected to open next year, will more than double the size of SugarHouse, to 260,000 square feet from 108,000 square feet, not including a 600,000-square-foot, seven-story parking garage that will give poker players, in particular, quick access to the tables. A 30-table poker room is part of the expansion plan.
Takeaway: 700 new slots could be shipped in 4Q 2014
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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