Cartoon of the Day: Sad State of the Consumer

Here’s a big reason we see #Q3Slowing.

Cartoon of the Day: Sad State of the Consumer - Econ Indicator 08.04.2014


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Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow.




  • Total revenues:  $2.578 billion
  • Adjusted EBITDA:  $592 million
  • EPS:  $0.10/share



  1. Strip casino demographics:  frequency of visits, spend per visit
  2. Q2 gaming trends look encouraging on the Strip. Can it be sustained heading into 2H 2014? Or will gaming spend under perform non-gaming?
  3. Convention rooms booking pace for 2015?
  4. What % of your chinese VIP player database do you cross market (e.g. Macau/Vegas)? Has VIP Chinese play picked up in Q2 - in either Las Vegas or Macau? Is there a correlation between Macau VIP and LVS?
  5. MGM Macau table revenue fell in 2 out of the 3 months in Q2, significantly underperforming the market due to VIP exposure.  How do you feel about the VIP customer in 2H 2014?  How is the performance of the new table initiatives?
  6. What factors attribute to the recent pick up in mass share at MGM Macau?
  7. How do you feel about your chances regarding the Massachusetts repeal referendum in November?
  8. Is the construction on MGM Cotai on track? Any labor issues?  What delays are you facing? Any permitting issues?
  9. Discuss early thoughts on how to address debt maturities in 2015 and 2016?






  • Market share is improving in a growing market
  • Control about half of the convention market


  • Based on current trends, MGM expects second quarter RevPAR to grow by approximately 5%.


  • 1Q:  On the hotel side, ARIA was able to grow RevPAR by some 14% YoY, driven by both improvements in occupancy and ADR.  Vdara had a record quarter, with hotel occupancy of 89.5%, an increase of over 400bps, and ADR increased 16% to $185, driving RevPAR up 21% to $165 in the quarter. Crystals continues to gain more traction and it, too, recorded results with EBITDA increasing some 30% year-on-year compared to the prior quarter.
  • Expect a record year out of Crystals in 2014 and probably better yet in 2015

Gaming metrics

  • International gaming business remained strong, and domestic rate of play continues to improve.  MGM saw increases in volumes across each of our casino segments – baccarat, non-baccarat table games, and slot handle YoY.  Slot handle and non-baccarat market share continues to grow.

Convention mix 

  • Expect to be near our prior peak for the entire year at around 16% of our total room nights coming from convention.  And to continue to grow this mix beyond that peak, MGM ultimately need more space
    • Mandalay Bay is the place to do that. It has 1.7 million square feet of convention space today and MGM is expanding that to 2 million square feet and that will not only retain and grow MGM's existing groups but also to attract a wide array of new trade shows and corporate groups.  This will solidify MGM's trade-show business while allowing them to increase their high-margin corporate business. They expect great ROI from this in 2016.
  • Seasonality:  strongest in the first quarter, good in the second quarter, weakest in the third and then flat or up in the fourth.

Corporate mix

  • In terms of corporate mix last year, it was about 55% and that's picking up this year to closer to 60% in terms of bookings and that's higher margin particularly in the F&B side.


Interest Expense

  • Interest expense decreased by some $16 million YoY 1Q as a result of continued efforts to lower borrowing costs and reduce debt; MGM expects this trend to continue.

Monte Carlo

  • Strip frontage at Monte Carlo is near completion.  MGM has already opened up three restaurants and are already experiencing significant traffic increases on that side of the Strip.

New York New York

  • Opening up Hershey's next month, which will be a killer and drive a lot of traffic over to the NYNY facade and continue that traffic increase when MGM opens up Tom's Urban and Shake Shack in December 2014.

LV Arena

  • In between NYNY and Monte Carlo that be about 80,000 square feet of very high energy entertainment and food and beverage. 
  • All of that opens in early 2016, accruing to the benefit of those properties and the west side of the Strip and across the street at MGM.

Mandalay Bay - THEhotel Delano remodel

  • Expect to be done in September...expect a significant increase in RevPAR 

MGM National Harbor

  • On track for Summer 2016 opening


  • Vastly exceeded expectations with over 850,000 average daily users on social gaming sites


  • 1Q 2014 flowthrough was 55%, in-line with expected range of 50% to 60% despite a lower hold comparison in the quarter.



  • Looking at cross segment table yield improvement opportunities between the VIP and the mass as well as product upgrades to refine the MGM experience 
  • Sustained market share
  • Mass market is now getting to that point where it's anchoring most of the operator's EBITDA performance (70% of 1Q EBITDA). And MGM sees that as being strong growth.

    Retail Callouts (8/4): KORS, TGT, JCP, ARO, H&M, BOSS

    Takeaway: KORS can’t rely on multiple expansion anymore. Don’t ignore cash conversion cycle (bad). Cornell picked TGT v JCP. Ullman looking to leave?



    Retail Callouts (8/4): KORS, TGT, JCP, ARO, H&M, BOSS - Chart1 8 4 2014




    Tuesday (8/5)

    • COH - Earnings Call: 8:30am
    • CVS - Earnings Call: 8:30am
    • NILE - Earnings Call: 8:30am


    Wednesday (8/6)

    • RL - Earnings Call: 8:30am


    Thursday (8/7)

    • TUMI - Earnings Call: 8:30am
    • HSNI - Earnings Call: 9:00am




    KORS - 1Q15 Earnings


    Takeaway: At risk of sounding punitive, this 12% EPS beat was just the 2nd lowest EPS beat in company history. But when you play the 'smoke and guide conservatively' game like KORS does, this stuff matters. The top line still looks solid, and growth outside of the US remains bullet-proof.  But the rate of gross margin improvement is decelerating, SG&A spending remains robust (+60%), and the cash conversion cycle looked horrible thanks to a 19 day increase in inventories. This might be a great brand, and a really good company. But something tells us that this print is a watershed event for the stock in that multiple expansion from here could be limited. That's not to say that the stock can't go higher -- but it will need to be driven by revenue and earnings growth.  Oh and by the way…if you're a CEO of a company and some of your metrics start to show weakness, do yourself a favor and don't verbally spank your shareholders on the conference call. Not a good idea.


    Retail Callouts (8/4): KORS, TGT, JCP, ARO, H&M, BOSS - chart2 8 4


    TGT - Target opens three new Canadian stores; plans three more



    • "Target opens three new stores in Canada Aug. 1 and plans three more new Canadian stores later in the fall. The stores are located at Erin Mills Town Centre in Mississauga, Ontario; Park Place in Barrie, Ontario and Carrefour Candiac in Candiac, Quebec."
    • "The opening of the three new stores brings the total number Target stores open in Canada to 130."


    Takeaway: The reality is that within the next 12 months, Target Canada will look very different than it does today. It will either a) close shop entirely, or b) invest the capital needed to ultimately be a viable and profitable player in the market. This is all on Cornell.


    JCP - In the CEO Hunt, Target’s Gain is J.C. Penney’s Loss



    • "Target beat out J.C. Penney in landing Brian Cornell as its next chief executive, people familiar with the matter said."
    • "The battered department store chain pursued Mr. Cornell about succeeding CEO Mike Ullman. Penney, which has been seeking Mr. Ullman’s successor for a year, contacted Mr. Cornell earlier this year."
    • "Despite Penney’s approach, Mr. Cornell 'never expressed any interest' in taking command there, one of the people said Friday."


    Takeaway: Truth be told, Cornell could have potentially had a much bigger payday at JCP than at TGT. But on a risk-adjusted basis, it's tough to question his decision.





    BOSS - Hugo Boss Shares Decline After Report Permia Seeks Exit



    • "Hugo Boss AG shares dropped as much as 3.7 percent after people familiar with the matter said that Permira Advisers LLP is discussing a potential sale of its remaining stake in the German fashion house."
    • "Permira, based in London, is in talks with advisers to find a buyer for its 56 percent holding in the German fashion label, valued at about 4.1 billion euros ($5.5 billion)..."


    Bangladesh Workers Protest Over Wages



    • "A 24-hour deadline to make back payments to 1,500 workers of apparel manufacturer Tuba Group in Dhaka, Bangladesh, created a deadlock on Sunday in talks to end a workers’ hunger strike."


    H&M tops list of largest certified organic cotton users



    • "H&M is again topping the list of the world’s biggest users of certified organic cotton, according to Textile Exchange’s latest Organic Cotton Market Report 2013. With a 29% increase in the last year, H&M manifests its leading position."
    • "This is part of the company’s strategic target to use only more sustainable cotton by 2020."


    ARO - P.S. From Aeropostale launches brand in Mexico, 100 stores on tap



    • "Aeropostale, Inc. will roll out its P.S. from Aeropostale brand in Mexico through a licensing partnership with Distribuidora Liverpool, S.A. de C.V."

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    European Banking Monitor: Portuguese and Russian Swaps Move Higher

    Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




    European Financial CDS - Portugal and Russia saw their bank swaps widen sharply, again, on the week. Not suprisingly, Portugal's Banco Espirito Santo - after weeks of heavy negative news flow - received a bailout over the weekend from the Bank of Portugal. Depositors and senior creditors appear to be protected, but everything downstream in the capital structure looks to be a washout. Meanwhile, US sanctions continue to take a toll on Russian banks, as Sberbank swaps widened 69 bps w/w to 352 bps and are up 110 bps on the month. 


    European Banking Monitor: Portuguese and Russian Swaps Move Higher - chart 1 financials cds


    Sovereign CDS – Sovereign swaps were wider in Portugal and Italy (+21 bps and +6 bps, respectively), but little changed elsewhere, and actually tightened 4 bps in Spain. The US and Germany were unchanged. 


    European Banking Monitor: Portuguese and Russian Swaps Move Higher - chart 2 sovereign CDS


    European Banking Monitor: Portuguese and Russian Swaps Move Higher - chart 3 sovereign CDS


    European Banking Monitor: Portuguese and Russian Swaps Move Higher - chart4 sovereign CDS


    Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 15 bps.


    European Banking Monitor: Portuguese and Russian Swaps Move Higher - chart5 euribor OIS spread



    Matthew Hedrick



    Ben Ryan



    LEISURE LETTER (08/04/2014)

    Tickers: IKGH, MGM, WYNN, CCL, RCL


    • Aug 5:
      • BEE 2Q 10am: , pw: 73605986
      • RHP 2Q 10am:
      • MGM 2Q 11am: , pw: 1985444
      • SGMS 2Q 430pm: , pw: SGMS
    • Aug 6:
      • HT 2Q 9 am:
    • Aug 7:
      • MPEL 2Q 8:30am: , pw: MPEL
    • Aug 8:
      • DRH 2Q 10am: , pw: 153358818
      • SHO 2Q 12n:


    IKGH – VIP promoter Iao Kun Group reported Rolling Chip volume of US$1.6 billion, up 7% YoY.  July win rate was 2.32%. July 2013 hold rate was 3.0%.

    Takeaway:  2nd straight month of VIP volume growth for IKGH.  Could VIP volumes in July not have declined as much as the Street expects?  We should receive the July Macau details tomorrow and we suspect that low hold played a role with VIP volumes performing better than VIP revenue.


    27:HK – A group of workers in the casino and hotel operations of Galaxy Entertainment Group Ltd will protest tomorrow outside of the Galaxy Macau. The workers are petitioning the Hong Kong-listed company to increase salaries, introduce changes to pay policies, and provide staff with more annual leave days and better career prospects.

    Takeaway: The natives are restless and no operator appears immune to the labor demonstrations.


    CWN:AU – Crown Resorts Ltd buying the vacant former Frontier Casino site on the Las Vegas Strip. Crown said it had established a joint-venture resort company to develop the site with former Wynn Las Vegas president Andrew Pascal, with financial backing from U.S. private equity firm Oaktree Capital Management. The group hopes to begin construction of a hotel-casino project in 2015 with a targeted opening in 2018. Packard was reportedly the runner up bid for the Cosmopolitan of Las Vegas earlier this year. 

    Takeaway: We doubt Crown paid El Ad Properties anything close to El Ad's $1.2 billion basis in the land.  Another private equity firm enters the gaming sector.


    GENM:MK – While the company is currently under construction on the 538,000 sq. ft Resorts World Birmingham for £150 million, with a scheduled opening in spring 2015, it is also is rumored to be one of the shortlisted final bidders for the entire NEC (National Exhibition Center) Midlands venue. Resorts Word Birmingham will feature outlet shopping, an Asian-themed spa, a four star hotel, cinema and international casino

    Takeaway: Genting building its global gaming empire.


    MGM – Springfield representatives and casino officials confirmed Friday MGM Resorts closed escrow on the former Zanetti School and the historic Springfield State Armory building late on Thursday. The final purchase price was $3.2 million – or $1.6 million for each building. The purchases come as the project’s future remains uncertain. Voters in November will decide whether to repeal the state’s 2011 casino law. MGM also paid the city more than $160,000 to cover property taxes assessed from the time MGM was awarded the parcels and when it closed on them. The casino’s agreement with Springfield calls for more than $15 million in upfront and advance payments as well as more than $25 million in annual payments.

    Takeaway: Setting the stage for the new development.


    WYNN – Wynn has proposed using custom-made catamarans, each able to carry 49 passengers, to connect a $1.6 billion hotel and casino on the Mystic River in Everett to Long Wharf in downtown and the World Trade Center in the Seaport, an extensive new service to reduce car traffic to the proposed resort, according to documents filed for review under the Massachusetts Environmental Policy Act. As many as three boats would be in service at one time, running from 6 a.m. to 2 a.m., and leaving as frequently as 20 minutes apart. 

    Takeaway: Wynn doing its best to reduce traffic and provide an alternate means of transportation to its proposed property.


    IHG:LN(Financial Times) reports that Marcato has hired investment bank Houlihan Lokey to advise it on options regarding Mercato's stake in Intercontinental Hotels.

    Takeaway: If at first you don't succeed ...hire a banker.  A tax inversion structure seems to be the latest proposal to US hotel companies.


    CCL (Caribbean Journal)  – announced that it had signed a memorandum of understanding to develop a $70 million destination cruise project in Tortuga (Ile de la Tortue), an island off the northern coast of Haiti.

    Takeaway:  Following NCL's Belize example? 


    CCL (Cruise Critic) – Tropical Storm Bertha has affected itineraries on Carnival Breeze, Carnival Liberty, and Carnival Valor


    RCL – TUI Cruises, a joint venture between TUI AG and Royal Caribbean Cruises, today ordered two more cruise ships for its Cruises unit to reflect high demand for cruise holidays in Germany and Europe. The new ships will be delivered in 2016 and 2017 and will take the fleet of TUI Cruises to six ships.  TUI Cruises currently operates 3 cruise ships, with a fourth being built.

    Takeaway:  Supply is heating up for Europe.  


    Crystals (Cruise Critic) – dropped 2015 Crystal Cruises has removed Israel port calls from Crystal Serenity's September 20, 2015 itinerary as a result of recent violent unrest.  Crystal joins at least two other lines that have canceled calls on Israel due to mounting tension. 

    Takeaway:  More cruise lines dropping Israel calls due to unrest.




    WYN – CFO Thomas G. Conforti sold 28,659 shares on Monday, July 28th at an average price of $78.25 and now owns 106,526 shares.


    RCL – CEO Richard D. Fain sold 94,850 shares on Tuesday, July 29th at an average price of $62.38 and now owns 1,131,395 shares.


    UnionPay Fines Merchants – China UnionPay has imposed fines of 100 million yuan (US$16.3 million) over the last four months on third-party payment firms for misusing merchant category codes, which is likely to have caused losses of hundreds of millions of yuan among credit card issuers this year. The merchant category code is the number that credit card issuers adopt to classify companies which have to pay fees upon use at point of sale (POS) and the fees vary based on the category or the industry they belong to. Third-party payment firms have been misusing business category codes–even using fake names for many companies to meet the category classification on the lower-fee-charged POS–in order to help the businesses accepting payments pay lower fees to credit card issuers.

    Takeaway: The next iteration in the crackdown in the misuse of the UnionPay point of sale devices.


    Chinese Tourists Avoiding Singapore (Bloomberg)  A strengthening Singapore $, rising labor costs and a 7% sales tax Chinese tourists don’t encounter in Hong Kong is hurting Singapore retail sales.  A reduction in Chinese visitors contributed to a sales slide of as much as 4% in Singapore’s annual shopping festival (Great Singapore Sale), according to the retailers’ association.

    Takeaway:  The Great Singapore Sale of 2014 turned out not so great.  We remain concerned with the Singapore economy and its impact on the LVS and Genting Singapore casinos there.


    Notable Property Transaction

    Malaysian company KSG Enterprises Ltd acquired the SpringHill Suites New York for $82 million or approx. $474,000 per key.  The 19-story, 173-key hotel, located at 25 W. 37th St., was developed from the ground up by Hidrock and Robert Finvarb, opened last year, and immediately achieved 90% occupancy.

    Takeaway: A very strong price per key for a midtown Manhattan limited service hotel.


    China Services July PMI:  fell to 54.2 from 55 in June, a six-month low


    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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