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Constant hold at wholly owned properties yields flattish EBITDA YoY while MGM Macau missed. Did we detect a softening tone regarding Macau business levels?




  • Wholly-owned Strip EBITDA up 12%
  • CityCenter EBITDA up 20%
  • Increase in mix from high-end main floor business.
  • May:  broke ground on Arena.  Will open in mid-2016. 
  • June:  CityCenter veiled Hershey store to great success.  Tom Urban/ Shake Shack will open in December.
  • Mandalay Bay:  half of rooms of Delano are complete.  Sept 1 grand opening.  Delano brand will attract higher rates and higher margin customers.
  • MGM Harbor Maryland:  have begun construction; mid-Atlantic market is thriving.  Expanding from 2.8m sq ft to 3.2m sq ft.  If demand warrants, can even expand 2nd floor.  Increased budget to US$1.2 bn, up from US$1bn previously, due to this new expansion plan.
  • Remain optimistic on Japan (Tokyo/Osaka); met with several local companies
  • MGM Cotai:  completed basement and now moving up to hotel tower.  On budget and on schedule to open in 2016 (no date or month offered).  
  • MGM:  7th consecutive YoY growth in EBITDA and margin improvement on LV Strip
  • Luxury Strip properties EBITDA grew 13% YoY
  • Core Strip properties EBITDA grew 8% YoY
  • Core Strip outperformed on REVPAR growth
  • Strip Bacc win: 64% YoY;  non-bacc win: +10% YoY
  • Grew convention mix by 1% in the quarter
  • FY convention mix to be up 16% - above prior peak levels
  • Expect REVPAR growth of 5% in 3Q
  • CityCenter:  
    • Aria:  increased table game volume and higher hold
    • Vdara:  +10% in REVPAR; occupancy just inside of 95%
    • Crystals:  +12% YoY in EBITDA
  • Cash:  $1.4 bn ($658m cash at MGM China);  
  • $1.2bn available under RC.  MGM China - $1.4bn available under RC 
  • CityCenter prepaid $150m outstanding debt, lowering debt to $1.5 bn; leverage at end of quarter was 4.5x.
  • 2Q capex:  $114m (domestic operations), $64m (MGM China) - $4m MGM Macau, $60m MGM Cotai
  • MGM China
    • Branding fees:  $4.5m
    • Lower VIP hold and turnover
    • EBITDA margins increased 90bps, due to higher mass revenues
    • Low VIP hold affected EBITDA by $14m YoY
    • Mass:  2nd consecutive quarter of outperformance, relative to market growth; 77% mass contribution to EBITDA (1Q contribution was 70%)
    • Slot revenue: +11%, lower hold but higher volumes
    • Continue to see more opportunities to improve table operations
    • Best mass win per day in the market
    • MGM Cotai:  $2.9bn budget; have 50% of contracts complete
      • 2nd phase:  all non-gaming; will add 700 guest rooms;  in 3Q, they will release preliminary budget
      • Govt process has changed in the past year
      • Wants to submit a perfect document on 2nd phase
      • Tremendously capacity constrained on hotel rooms in Macau
    • MGM Macau:  highest EBITDA per room in the Macau market
    • 2 hotels open in Mainland China; more under construction


Q & A

  • Macau:  Backlog of construction projects;  operators don't know exactly when they will open.  Labor will always be an inhibiting factor. Have received superstructure/ MEP permits. Will open in 2016 but don't know when.  Will not give a precise timeline.
  • MGM China 2Q EBITDA margins:  nothing exceptional there.  No adverse effect from 14th month payments.  Low hold did have some impact but was offset by strong mass revenues.  Clean comparison.
  • 37% flowthrough in 2Q; Monte Carlo had a bad quarter there
  • Delano also affected flowthrough due to construction disruptions
  • Still believe in 50-60% flowthrough going forward
  • Gained market share in convention business and REVPAR
  • Monte Carlo/Mandalay flowthrough will be below 50-60% in 3Q but once Delano opens in September, flowthrough will improve.
  • FTEs up slightly from 2013
  • Continue to maintain costs and expand margins
  • 2015 group convention pace:  pace up double digits (+16k rooms) and higher rate, despite tough comp with ConAgg.
  • 2015: Low single digit rate growth, suggesting low single digit REVPAR 
  • 2015 corporate business:  increasing from 55% to 60% of bookings
  • More high-end business in LV Vegas as a result of increased visibility in Macau - didn't say that LV is up because Macau is down
  • Mayweather fight in May increased baccarat volumes
  • Another Mayweather fight in Sept 2014
  • 2 hotels (Sanya, Chengdu); Sanya benefited from MGM Macau
  • MGM Macau:  Slot volumes - very strong in premium area but unlucky; however, have seen high hold in July 
  • Macau:  junket business still consolidating/stabilizing.  Mass business continues to be strong - Grant Bowie did caveat the commentary by talking about summer being slower now similar to other markets
  • Mass in Macau is competitive - this question was in response to a question about whether there is margin pressure on the mass business and Grant seemed to concede there is
  • Flowthrough color:  YTD, 45%.  Continue to expect 50-60% for the full year.
  • Convention business strong in 4Q 2014
  • 2015 renovation projects:  Standard room tower at Mandalay Bay
  • Adding 300k sq ft of convention space to Mandalay Bay; will break ground in 1-1.5 months; will open in 3Q 2015.
  • Crown transaction in LV:  $9m per acre; certainly a bullish sign for investors; will stimulate the start of the Genting project
  • CityCenter:  generating significant amount of free cash
  • Did explore Crystals sale in 2013 (sub 5 cap rate);  $45M NOI on TTM; thinks it can go to $50Ms.  
  • Want to own 100% CityCenter but Dubai World doesn't want to sell

On Earnings Score Card Consumer Staples is Dead Last!

We’re more than halfway through the earnings season for the sector and we thought it was worth flashing our table that ranks the earnings performance of the S&P500’s 9 sectors.  Of note, Consumer Staples (XLP) is ranked dead last across Revenue and EPS performance!

  • XLP Revenue beats = 35%
  • XLP EPS beats = 48%

On Earnings Score Card Consumer Staples is Dead Last! - 2Q14ES BeatMiss


While the XLP sector has been preferred for such factors as dividend yield and consolidation potential, we’d expect the top and bottom lines of the remainder of the companies reporting this quarter and in 2H to be challenged on:

  • U.S. Macro Factors – as outlined by our macro team, we continue to expect consumption to suffer as U.S. growth slows and inflation rises, in-line with the team’s quarterly themes of #InflationAccelerating (Q1 2014); #ConsumerSlowing (Q2 2014 ); and #Q3 Slowing (Q3 2014)
  • Less Fat to Cut – staples companies have significantly trimmed costs and improved efficiencies to a great extent over recent years. As top lines slow due to macro and consumer factors, we believe companies will be challenged to grow bottom line results with less fat to trim.  Included, we expect input (commodity costs) to remain elevated.
  • Emerging Market Mixed – once the sector’s great growth engine (China, Brazil, India, Russia) we’re seeing slower growth and higher inflation impact the emerging market.  Despite pockets of improvement, we’re seeing lower margins (versus other geographies) and a weaker consumer impacting results.
  • Europe Slow– though off ‘crisis’ lows, Europe has weakened in mid 2014 (PMIs and confidence figures down). With unemployment rates high and sticky, we think Branded company sales will struggle and price taking will be challenged to make up for volume declines. 
  • Hefty Valuation – while the sector’s valuation (P/E of 18.8x) has come in over recent weeks from a 5 year high (see chart below), we could see investor enthusiasm wane alongside slowing growth across the sector. 

On Earnings Score Card Consumer Staples is Dead Last! - z. cs pe


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Cartoon of the Day: Moving Target

Cartoon of the Day: Moving Target - TARGET cartoon


Target stock is declining today after the retailer slashed guidance.




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TGT – Clears The Deck For Cornell

Takeaway: TGT cleared the deck for Cornell’s 8/12 start as CEO. But just because the deck is clear, it does not mean it’s structurally sound.

We weren’t overly surprised by Target’s guide-down today due to a) the fact that our comp and Gross Margin expectations were well below consensus for the quarter, and b) it makes sense that the company would want to front-load this news along with any lingering costs associated with the data breach and its debt retirement before Brian Cornell steps into the CEO seat on August 12.  No CEO wants to step into a new role only to deal with near-term earnings events that he had nothing to do with. Look at Doug McMillon at Wal-Mart. He started at his job on Saturday February 1st, but the day before WMT guided down by 3% (meaningful for WMT).


While the TGT headline talks about data breach and debt retirement costs, it’s important to note that comps are flat, and that  was despite increased promotional activity. Canada was weaker than guided, though probably not much weaker than we expected. TGT reported this on the same day that we got yet another blockbuster week of retail sales data from ICSC. We’ve been looking at a string of weekly sales reports in aggregate that are better than 4% vs last year. The 2-year trend is also decidedly positive. If there was ever a time for even a mediocre retailer to surprise on the upside, we’d argue that this is it. But TGT did not. Maybe it’s because the high-end is outperforming, and TGT is going increasingly after the low-end consumer.  Or maybe the retailer still has remarkably poor traction with consumers relative to its competitive set.


TGT – Clears The Deck For Cornell - ICSC YoY

TGT – Clears The Deck For Cornell - ICSC 2yr


In the end, we’re still short TGT – though we fully acknowledge that all eyes are on Cornell at this point. We don’t yet know what he’ll do once in office. Will he patch the operation enough to boost earnings in years 1 and 2? That might be enough for the equity market to get behind the stock. Or, will he champion the investments needed to fix Target meaningfully and restore its reputation as one of the great retailers in the US? That would hurt earnings considerably near-term, but could make it a big winner in the outer years.


While the path that Cornell takes is in question, one thing that we think is inarguable for a long-term investor; to win big with TGT, it’s going to be very painful near-term. If the painful steps are not taken, then it does little to sharpen TGT’s positioning amongst a very tough competitive set (WMT, Department Stores, Dollar Stores, Supermarkets, and Amazon).


TGT – Clears The Deck For Cornell - tgt financials


Takeaway: Home prices increases have decelerated by 490 bps in the last five months. The headwinds should persist for another ~6-8 months.

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. 




Today's Focus: July CoreLogic Home Price Report

CoreLogic released its monthly home price report for June/July earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 


CoreLogic estimates that home prices rose +7.0% YoY in July, a deceleration vs the +7.5% in June and +8.3% in May. We show this in the first chart below.


Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. In the last two months, however, the revision was negative. The preliminary estimate for June was +7.7% and the final number came in at +7.5%. Meanwhile, May has been downwardly revised twice in the last two month. It began at +8.9%, was cut to 8.8% and is now 8.3%.


Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.9% YoY). As such, we think the next 6-8 months of worsening pricing data will weigh on the housing complex.


Our main thesis on housing is that the rate of home price appreciation will slow meaningfully over the course of 2014 and into 2015. Historically, inflections in the rate of HPI or HPD have been major macro drivers of relative positive or negative performance.








About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."


Joshua Steiner, CFA


Christian B. Drake