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NCLH 2Q 2014 CONFERENCE CALL

Management's conference call tone was positive, despite lower Q3 guidance. However, we remain cautious on Q4 guidance as pricing may not match the bullish volume commentary.

 

 

CONF CALL

  • Caribbean environment:  highly promotional
  • Core fleet has done well 
  • Getaway:  leads in guest satisfaction
  • Expanded casino partnerships
  • Tougher comps will ease in 4Q
  • Anticipate the promotional market to continue for the year and into early 2015
  • Europe:  Med continues to do well
  • 3Q:  tougher comps YoY (strategically held pricing in 3Q 2013 (ticket yields was up 5%);
  • Going forward, Breakaway yields expected to perform in-line with rest of fleet;  
  • Higher Caribbean capacity in Q3 (23%) is reason why yield guidance is lower in Q3  this holds no water since you have to Bermuda in the mix.  Q3 Caribbean+Bermuda capacity is 40% of total itineraries vs 32% year ago.
  • Overall, 2014 load is ahead of 2013
  • Q3 deployment:  23% in Caribbean, 32% in Europe, 17% in Bermuda, 18% in Alaska
  • 3Q:  doubling of Caribbean capacity YoY in Miami due to Getaway.  Absent its introduction, yields would be 200bps higher
  • Getaway 5-yr payback
  • 4Q:  easier Caribbean comps
  • Higher costs on new ship orders (2018-2019):  higher euros, new enhancements on ship; will take a little more than 5 yrs to pay back

 

Q & A

  • Started to see some booking traction (last 12 wks):  substantial growth (+20%) in booking activity
  • Q3/Q4:  solidly loaded over prior yr; can protect pricing
  • Cautiously optimistic 
  • Feel better about pricing
  • Cost volatility from Q3 to Q4:  food offerings, guest interaction investments from the NEXT program
  • 2015:  better loaded across the board than in 2014 and 2013; pricing looks good; beginning of a fundamental shift (most of pressure in Q1 (Super Bowl lap))
  • 2015 pricing should be solid
  • Feeling better about Caribbean in 2015 (excluding Q1)
  • Lower cost of sales
    • In Q2, have lowered port agreement costs
    • Have expanded casino players, with no incremental costs
    • Had done less air packages and aggressively negotiated with credit card companies
  • Hearing from Genting that they will not sell at current levels
  • Frustrated with stock price
  • Recently mandated a 3% price increase across fleet.... still seeing good volume
  • Alaska:  overall pleased.  Sun booked significantly better than 2013.
  • Europe:  Q2 pricing above 10% (because of easy comps in 2013)
  • Two ships year-around in Europe which benefits Q4, with signficantly higher pricing and load
  • Premiums on new ships:  across 12 months,  still double digit premiums but onboard could be impacted by a mix issue (larger families spend less onboard)
  • Don't have any 'old' ships; not looking to sell any ships

RAI – Strong Pricing Offsets Volume Declines

We’re encouraged by the performance of RAI in the quarter, driven on strong price realization.  The company reported Q2 revenue of $2.16B (or -0.6% Y/Y) that came in lighter than consensus expectations of $2.19B, yet it beat consensus EPS by 2 cents at $0.89 (or +6.0% Y/Y). The quarter was marked by share gains from its core brands (Camel, Pall Mall, Grizzly, and American Spirits), and pricing to offset massive cigarette volume declines of -8.3% in the quarter (versus est. industry average volume of -5.5%), and impacted by one less shipping day in the quarter. Total cigarette market share was down 0.1pp to 26.5% in the quarter.

 

From a quantitative perspective RAI is broken across its immediate term TRADE and intermediate term TREND durations, follow the leg-down after the announcement of its announcement to acquire LO two weeks ago (see chart below).  

RAI – Strong Pricing Offsets Volume Declines - z. rai

 

From a fundamental perspective, we remain constructive on a proposed RAI + LO. The combined entity would make it the 2nd largest U.S. tobacco company to compete with #1 MO (~51% share).  We remain extremely bullish on menthol’s superior fundamentals to traditional tobacco, and Newport Menthol is the #1 U.S. menthol brand (37.4%). RAI+LO would reap $800M in cost savings over two years (according to the company) and we think the strong sales and brand equity of LO’s portfolio is complemented well by the strength in RAI’s non-menthol brands like Camel, and its more western U.S. geographic exposure.  The combined company’s ability to leverage a larger sales force, attain more shelf space and compete for higher margin (premium and above premium cigarettes and smokeless) should prove very profitable.  

 

If the stock can overcome our resistance levels, we expect it to grind higher in the back half of the year as the regulatory process plays out. As a reminder the closing is not expected until 1H 2015, and there may be hiccups along the way due to the brands it intends to divest to Imperial to reduce its menthol portfolio.

 

In the quarter, there was no updated information on the proposed acquisition of Lorillard.  A key question that remained unanswered from management is whether going forward we can expect non-combustible products like its e-cigarette VUSE to make up for declining cigarette volume and whether RAI can get VUSE to a margin at or above cigarettes. Clearly, investors have concerns on how cannibalization of cigarettes is playing out alongside the adoption of e-cigarettes, and the company was undefined, citing “early days” in the category.

 

What’s clear is that VUSE is creating an investment drag on the company. In the quarter operating income for the “All Other” segment, which includes VUSE, was a -$49M loss (versus -$39M last quarter).  This loss is expected as the company supports the launch of VUSE, yet it begs the question on when RAI expects VUSE to be profitable.  The company stated that it will continue to invest behind VUSE for the balance of 2014 and into 2015, and expects VUSE to be profitable sometime in the middle of 2015.  For reference, if we look at blu, which LO acquired in Q1 2012, LO’s operating profit was a mere $6M on $231M for FY 2013 (7 quarters later), signaling just how capital intense supporting the new category was for them.   

 

CEO Susan Cameron said the national roll-out of VUSE (underway in the western states of America since June with plans to move eastward in early September) is progressing smoothly, currently in ~ 21,000 retail outlets. She’s confident that the technology sharing agreement with BAT offers both enhanced innovation and the ability to take the brand VUSE global.

 

The company tightened its FY 2014 guidance to $3.35 to $3.45 (or 5% to 8%) versus prior guidance of $3.30 to $3.45 and repurchased 4.8M (worth $267M) in the second quarter to complete its $2.5B share repurchase program started in November 2011. 

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 


GLPI Q2 2014 CONFERENCE CALL NOTES

The long and slow process of validating the operating strategy continues - territory well known to other REITs charting a new course in new asset categories.

 

 

PREPARED REMARKS

  • Achieved predictable earnings and on balance feel good about day-to-day at GLPI

Q&A

  • Rent Escalator, why exclude?
    • Reason to believe results through October will be slightly below 1.8x coverage, prudent.  No special information and making objective judgement.  PENN includes no escalator in its guidance.
  • ISLE acquisition and potential accretion... Iowa properties impact decision?
    • Given event, GLPI not want to own properties in Iowa. However, GLPI looks at all possible transactions.
  • Search for operators at The Meadows, strict/formal process?
    • Searching for operator, but also put forward a TRS application to be operator if unable to find an operator.  Talking with all potential operators, public as well as private equity.  Should have a decision in a few weeks.
  • The Meadows transaction - put into TRS as temporary or permanently?
    • Strategically no interest in being long-term operator of The Meadows...deadlines GLPI needs to meet regarding purchase transaction - will be disclosed in the 10Q. 
    • When asset sits in the TRS reduces flexibility to do a portfolio transaction due to limitations on TRS.
  • OpCo transaction at The Meadows - strategic, financial, surprises?
    • Interest "was" expansive, not limited to specific buyer -- PE, multi-tenant, investors...currently working to bring transaction to a closing.  Had 18 parties interested -- implied GLPI is at "last and final" offer stage.
  • The Meadows closing?
    • Approvals by States as well as steps of transactions dictate still 2015, no delay. 
    • If no operator, raise equity capital at 5.5x EBITDA
  • Stabilization in any regional gaming trends?
    • Outlook is not exciting, nor is there good news...month-to-month.  Regional markets very crowded. Lower end <$100 theo player is not back, not healthy.  Upper end okay. 
    • Perryville:  Baltimore opening will negatively impact Perryville and reflected in GLPI guidance. 
    • Big picture trends are not great.  
    • Schools extended in NE, caused extended graduation dates resulted in very slow June.  Saw at Perryville.  First two weeks okay, third week drop off - believe due to high school graduations...(side bar - no mention of delayed spend tied to July 4th holiday - let's see what mgmt says for 3Q).
    • First week in July very encouraging
    • Do not expect anything robust in 2H 2014.
  • Volume of discussion for acquisitions picked up over past three months - given prepared remarks?
    • Enough to do, but want to make the right deal.  Focused on growing accretive earnings and growing dividend base. 
  • Who is starting discussions? 
    • Both sides -- GLPI as buyer as well as sellers coming to GLPI.
    • Surprised by how often GLPI is contacted for new markets for development partner.
  • Interest in more properties in Illinois?
    • Interested in properties everywhere - if credit is good
    • Doing business in Illinois is like doing business in ZImbabwe, very unstable...never know where the State is going.  
    • Hearing from operators in Illinois, not clear this is the it will happen... AND not sure Illinois will see an increase in GGR and gaming tax.  In fact, expect Illinois to see less gaming tax if new casinos open due to progressive tax rate.  More than sufficient gaming in Illinois. 
  • More difficult to sell and operating asset or more difficult to buy an asset with operations?
    • Complexity of tax-basis and liabilities - acquiring is complex but selling operator FF&E and operations is challenging but off-set is step up on basis.  Both sides "hard" in this world today.
  • Mechanics of a portfolio transaction - how sell an operator, entity or single assets? 
    • Transactions are complex and increased uncertainty.  In perfect world have tenant identified at time of contract.  Ideally, simultaneous purchases of a portfolio transaction.
  • Push back on deal volume - sellers need higher multiple or waiting for higher EBITDA?
    • Nobody said anything about push back...don't assume push back. 
  • Expectation for competition from a new gaming REIT - due to activist pressures? 
    • Have 100% confidence other companies looking at structure but from GLPI experience - process is long, time consuming, maddening, monumentally difficult and expensive. 
    • PENN didn't have "massively" large investors (related party rules).  
    • Tax basis calculations are complex and sometimes contra to the process.
    • Not surprised nobody has done a conversion within gaming sector. Smart that gaming companies have not made premature announcements as timeline is lengthy.  Not expect any company announcement for at least 12 months from today...
  • Any interest in Atlantic City at fire sale prices?
    • Need owner to pay rent, need EBITDA - therefore, very limited interest and not holding any talks with any property of interest in AC.

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 80.28%
  • SHORT SIGNALS 78.51%

Retail Callouts (7/29): Retail Sales, TGT, LULU, Puma/KER, GILT/RueLaLa, AMZN

Takeaway: Astounding week for retail sales. TGT puts nail in coffin of price equation in Canada. LULU Lole. GILT/Rue La La makes a ton of sense.

EVENTS TO WATCH

 

Wednesday (7/30)

KER - Earnings Call: 12:00pm

WFM - Earnings Call: 5:00pm

 

Thursday (7/31)

GIL - Earnings Call: 8:30am

SHOO - Earnings Call: 8:30am

 

 

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway:  Sales trends per the ICSC Index still look surprisingly good. The one week trend is choppy (albeit setting the highest growth rate in three years), but the two-year trend is almost equally impressive. These numbers seem inconsistent with what we're seeing from the companies reporting right now. But if they're right, then we're in for a good retail earnings season next month.

Retail Callouts (7/29): Retail Sales, TGT, LULU, Puma/KER, GILT/RueLaLa, AMZN - chart1 7 29 2014

 

Retail Callouts (7/29): Retail Sales, TGT, LULU, Puma/KER, GILT/RueLaLa, AMZN - chart2 7 29 2014

 

 

COMPANY NEWS

 

TGT - Target looks to drive BTS traffic to its Canadian stores

(http://www.retailingtoday.com/article/target-looks-drive-bts-traffic-its-canadian-stores)

 

  • "Target is looking to bolster sales results in Canada by appealing to parents and students this back-to-school season, offering everything from fashion to school supplies at prices that it touts as 'unbeatable.'"
  • "Target even commissioned a survey, which showed that 51% of Canadian moms describe back-to-school shopping as expensive and stressful, allowing the retailer to position itself as a stress-free, inexpensive destination. In stores, for example, bright signage identifies the different departments as well as the back-to-school shop located at the back of the store."

 

Takeaway: In the third move in two weeks (2% vendor rebate requests, price-matching of groceries, and now this) Target is showing that the most important component to winning in Canada is price. While that might help near-term market share, it's absolutely the wrong decision for long-term shareholders.

 

TGT - How to fix Target Canada’s problems in six easy steps

(http://www.canadianbusiness.com/companies-and-industries/how-to-fix-target-canada/)

 

  • "It’s a big job—some might even say daunting—and, frankly, we thought they could use some help. We called up some of the brightest minds in retail and put the challenge to them. Here’s their no-fail plan to deliver a direct hit for Target in Canada in six simple steps."

 

LULU - Lolë to Erode Lululemon Market Share with Canadian Store Expansion

(http://www.retail-insider.com/retail-insider/2014/7/lole)

 

  • "Lululemon will face increased competition, as Montreal-based Lolë plans to open as many as nine new Canadian stores by the end of next year. This women's activewear brand already has 14 Canadian locations, and it seeks to significantly expand both by opening new stores, as well as grow its wholesale distribution network."

 

Takeaway: While this article is a bit sensationalistic, to say the least, the reality is that it is more of the same -- when a category gets hot, the company that exploded the category needs to fend off competition and evolve. Selling dresses, Denim and Bags is probably not the answer -- though that's where LULU is headed. We think that an appropriate-sized/quality management team would be more aggressive in not only fending off competition, but crushing it. Despite all this, we still like LULU on the long side, as we think that the Activism set in motion by the Founder will lead to far more ways that that shareholders can win vs. lose. See our recent LULU presentation for full details.

For the summary note Click Here

 

Gilt, Rue La La, EBAY - Report: Rue La La attracts Gilt Groupe for potential sale

(http://fortune.com/2014/07/28/report-rue-la-la-attracts-gilt-groupe-for-potential-sale/)

 

  • "Fashion e-commerce company Rue La La, which specializes in flash sales for its members, is reportedly putting itself up for sale and rival online shopping site Gilt Groupe could be a potential suitor."

 

Takeaway: This makes all the sense in the world. The reality is that these fashion e-commerce sites might have fantastic brand cache and allure, but there is one thing that they don't have -- and never will -- scale.  When you're dealing with limited allocations of sought-after merchandise, you simply can't scale it up at a level that will materially grow the bottom line. One of the only ways for them to grow their businesses is to acquire.

 

PUMA Earnings:

(http://n.equitystory.com/c/fncls.ssp?u=VDVPRUPFWO)

 

Takeaway: Puma missed again -- because that's what it does. But the reality is the quarter was really not too bad. Revenue growth was respectable -- albeit helped by the World Cup. The only question we have is when the brand's recovery gets to a point where Kering (which owns 84%) will be comfortable stepping up and buying Quiksilver or Lululemon.

 

 

OTHER NEWS

LULU, NKE, UA, AdiBok - Workout Clothes With High-Tech Twist Sell Briskly

(http://www.nytimes.com/2014/07/29/business/workout-clothes-with-high-tech-twist-sell-briskly.html?partner=yahoofinance&_r=0)

 

  • "Gym shirts made of Kevlar. Underpants featuring “anti-odor technology.” No-sweat briefs. Lycra made of corn. And exercise shorts designed with Cordura, a rugged material most often associated with things like car seats and luggage."
  • "As outfits based on yoga pants have become increasingly popular as streetwear, and have even infiltrated the office in recent years, the sale of athletic apparel has exploded."
  • "'I have two daughters, and their closets are full of Lululemon,' he said. 'But I’m not sure they could find their way to a yoga place.'"

 

AMZN - Amazon Customers Become Designers with New 3D Printed Products Store Offering Customizable Fashion Accessories, Toys, Home Décor and More

(http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1951812&highlight=)

 

  • "Amazon  announced the launch of the 3D Printed Products store (www.amazon.com/3dp), a marketplace that gives customers access to more than 200 unique print on-demand products, many that can be customized by material, size, styles and color variations, and personalized with text and image imprints. The new store is one of the largest online destinations to discover 3D printed products featuring convenient search tools, interactive 3D preview functionality and a product personalization widget."

 

Mall Construction Boom Is Fuelled By The Tastes Of Canada's Wealthiest

(http://www.huffingtonpost.ca/2014/07/28/upscale-malls-canada_n_5627450.html)

 

  • "While big box retailers like Target have struggled to get a foothold in Canadian markets, demand for luxury retailers is strong and fuelling massive expansion projects at shopping malls across the country."
  • "According to research by commercial real estate company CBRE Group, more luxury retailers are predicted to arrive in Canada, albeit at a more moderate pace compared to the flurry of activity seen in the last three years."

 

TGT, EBAY - Trade groups unite on payments initiative

(http://www.retailingtoday.com/article/trade-groups-unite-payments-initiative)

 

  • "The National Retail Federation (NRF), Retail Industry Leaders Association (RILA), Food Marketing Institute (FMI), Merchant Advisory Group, National Association of Convenience Stores (NACS), National Grocers Association and National Restaurant Association (NRA) are jointly calling for an open and universal tokenization standard in the U.S. payments system."
  • "The groups released a statement saying payment card data is currently vulnerable to theft where card information is swiped or entered, where card information is stored, and where it is transmitted."

 

AMZN - Amazon to open five new warehouses in India

(http://www.reuters.com/article/2014/07/28/us-amazon-com-india-idUSKBN0FX0PW20140728)

 

  • "Amazon.com Inc's Indian unit will open five new warehouses in the country, which will almost double its storage capacity to half a million square feet, the company said in a statement on Monday."

 

PVH - Tommy Hilfiger reveals global advertising campaign

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=166377)

 

  • "The Tommy Hilfiger Group, which is wholly owned by PVH Corp., announces its Fall 2014 global advertising campaign la víe en rõpe. The Hilfigers – the beloved all-American family at the heart of the brand’s marketing strategy – make the trek to Lake Tahoe, where California and Nevada meet, to establish a preppy outpost as the eclectic group of characters conquer the great outdoors."

 

URBN - Urban Outfitters, New York City

(http://www.chainstoreage.com/slideshow/urban-outfitters-new-york-city)

 

  • "Urban Outfitters has gone big — really big — in New York City, opening a 57,000-sq.-ft. ‘lifestyle center’ store in Manhattan’s Herald Square area."

Case-Shiller Helps Us Predict the Past

Takeaway: The rearview report for May (effectively April data for CS) says…..

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

 

Case-Shiller Helps Us Predict the Past - Compendium 072914

 

Today's Focus: May S&P/Case-Shiller Home Price Report

 

Key Takeaways

With June data from Corelogic in hand for almost a month already, we knew the slope and likely magnitude of the deceleration for case-shiller in May, but it's nice to get the official confirmation. We should get the Corelogic home price report for July either this Friday or Monday next week, which will be the far more important report.

 

* Home Prices growth slowed for a sixth consecutive month,  decelerating -148bps sequentially in May to +9.3% YoY.  This was the second biggest month of deceleration since August of 2010 (last month was the largest at -155bps). 

 

* Notably, May marked the 1st month of negative MoM price growth since January 2012 in the seasonally-adjusted series. 

 

So, all the primary price series continue to tell a cohesive story of deceleration – one which we expect to continue through the back half of the year. 

 

Case-Shiller Helps Us Predict the Past - CS 20City NSA YoY TTM

 

Case-Shiller Helps Us Predict the Past - CS SA MoM

 

Case-Shiller Helps Us Predict the Past - CS NSA Index LT

 

Case-Shiller Helps Us Predict the Past - CS Index Weight vs Price Chg YoY Scatter

 

Case-Shiller Helps Us Predict the Past - PHS vs CS 18Mo lag

 

 

Bottom Line:

Housing-related equities follow the path of HPI. So long as HPI is decelerating, housing equities will move sideways to lower. We can forecast HPI's path by looking at demand trends on a 12-18 month lead/lag basis. Our expectation is that prices continue to decelerate throughout 2H14 and potentially into 1H15.

 

 

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake


WYNN 2Q 2014 CONFERENCE CALL

CC Commentary: best ever July in LV is good. Best July ever in Macau since 2011 is not that big of a deal - Wynn's market share is up (high hold) YoY with a market that's slightly down.

 

 

CONF CALL

  • Wynn Cotai:  18 months out; on budget, on schedule.  On track to open CNY 2016.
  • Comparisons against Sands China 
    • Sands have 10x rooms as Wynn Macau has, twice the EBITDA as WYNN
    • $17k retail per sq ft.  (Sands: $2,400 retail sales sq ft)
    • Win per slot: $105k (Sands:  $36k)
    • Win per table $2.1m (Sands:  $1.5m)
    • ADR:  $334 (Sands:  $210)
  • LV EBITDA per room: $33k ($9.6k - competitors)
  • Macau EBITDA per room:  $304k ($80k - competitors)
  • Do not want to cannibalize Peninsula.  Occupancy is 98%

Q & A

  • Macau margins:   $21M incremental labor expense ($6m of that is one-time); going forward, $5-7m incremental expense per quarter.
  • Held low on direct play (100bps lower than norm)
  • Saw slowdown in June, particularly among smaller junket operators
  • Business picked back up in junket operators in July (best July ever in LV and Macau)
    • Macau:  Best July since July 2011; stabilizing on VIP, growing on mass/slots
  • LV affecting Macau?  Only anecdotal - Hedgeye research shows no correlation between LV and Macau Baccarat volumes
  • LV:  have an edge on casino marketing on Asian/Latino players
  • Pushing $50m in July in Las Vegas;  would like to target $500m for 2014
  • Macau non-gaming revenue:  weakness in launch boutique areas
  • Construction on whole south end of Wynn Macau:  $60m, renovation scheduled to finish CNY 2015; lower slot counts due to the renovation.  May or may not bring back those slots in the future...focused on profitability per slot
  • Peninsula promotional expenses going higher?  Margins have remained very steady on mass and slots
  • Demand for WYNN product are more elastic, relative to their competitors
  • High-end Chinese consumers looking at gaming as part of their normal entertainment budget.  Seeing more new VIP customers.  Bodes well for the long-term.
  • LV:  domestic gaming have not grown since 2007; other segments have done well
  • Macau table metrics:  VIP per unit/day: 32k, MASS per unit/day: 17k
  • Macau table count:  263 vip, 191 mass (#s down due to construction)
  • Parisian/MGM Cotai construction in Macau:  non-existent or stalled

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