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DKS - Uninvestable

Takeaway: There're puts/takes w the qtr…but bigger picture, there’s more bad news to come. We think 5-6% margins are more likely than recent 9% peak.

Conclusion: ‘Better than expected’ does not equate to a good quarter. Yes, we liked the 3.2% comp, 96% new store productivity, and $100mm repo – the second highest ever for DKS in a single quarter. It’s rare that DKS beats a quarter – we’ll give a golf clap when it’s due. But when all is said and done, depending on how you adjust for special charges, earnings were down between 5-10% on +10% sales growth. Not exactly a good quality number. On top of that, inventories remain elevated, margins are under pressure, and e-commerce grew at its lowest rate in 11 quarters. None of these factors get us particularly excited about owning this name – over any duration. Most importantly, to us at least, while people will obviously be talking about Golf due to the horrible trends and restructuring, we think there are bigger takeaways;  a) looked at over a longer time period, this Golf Galaxy deal was simply horrendous. DKS bought at the top of a golf cycle, and is downsizing at the bottom of one. Textbook example of how not to deploy capital. B) we think that there’s a bifurcation in the golf market that is making it structurally unable for DKS/Golf Galaxy  to compete. The company is taking its presence from 20% of sales to 15% and ultimately to 10%. Maybe the right answer is zero. The bigger question is whether or not this is an example that might apply to the rest of the Dick’s business as well.  We’re modeling mid-single digit EPS growth – 200-300bp below the rate of store growth – over the next 5 years. We think that this stock is flat-out expensive.



There are a few things that don’t sit right with us about the Golf business, and the downsizing effort that the company is taking. Clearly, the golf equipment business is under severe pressure. That’s nothing new. This started six quarters ago for Dick’s, and has manifested itself in financial results for virtually every other retailer and brand that participates heavily in the Golf business. But what we don’t understand is that Dick’s bought Golf Galaxy in 2006 – right at the top of a golf cycle -- as a way to strategically double down on a category that it viewed as a long-term value creator. Now we’re sitting here at what is arguably the bottom of the golf cycle, DKS is cutting costs from the model outright, and it’s even talking about how 63% of its Golf Galaxy leases come up within 3-years and will be candidates for closure. We’re not necessarily saying that golf is a good investment now. But with retailers under pressure and OEM’s cutting capital allocation to golf equipment, this strikes us as an opportunity to take share and reposition for the next upturn, if nothing else. Buying High, and Selling Low is rarely a winning strategy. Unless of course, the company has reason to think that it simply won’t be a part of any upturn in the market.


DKS - Uninvestable - dks1 


Based on the monthly sales trends for Amazon and eBay, we’re inclined to think that DKS is right in that it will simply not participate in any eventual upside in the golf space.  In other words, we can simply write this off as a deal gone bad.  Consider this. The time of year where most golf equipment is bought at full price is in April and May. Then discounts pick up in June, and accelerate meaningfully as the Summer progresses. Amazon’s numbers, in particular, show a simply staggering acceleration from -5% in April/May to 43% as we entered the key discounting period in July.


DKS - Uninvestable - dks2 


What we think is happening is that there’s an increasing bifurcation in the golf market.  Dick’s sells primarily to the ‘Occasional’ golfer, which accounts for about 44% of the golfing population. ‘Avid’ and ‘Core’ golfers are about 26% and 30%, respectively, and tend to shop in much higher-end golf specialty stores. One might think that this is not too bad, as it leaves 44% of the market for Dick’s. But that ‘Occasional’ player is also the lightest spender, and only accounts for about 19% of the market. That’s the same consumer that is more inclined to shop on Amazon or eBay for equipment at a heavy discount. An Avid golfer (45% of total spending) is not buying new gear on Amazon in August because it’s cheaper. They don’t care about price – and they have a favorite local store with high-end service where they buy equipment. Dick’s attempted to fill that void by hiring 400 Golf Pros to work in its Golf Galaxy stores. But they were all fired last month. Dick’s can’t compete with the golf specialty shops at the high end, and it’s proving that it can’t compete online with Amazon at the low-end.


DKS - Uninvestable - dks3 


DKS - Uninvestable - dks financials


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Multi-family Remains the Driver of New Construction Activity

Takeaway: Strength in July offset the May/June declines. SF remains middling while MF remains the predominate driver of new construction activity.

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.


Multi-family Remains the Driver of New Construction Activity - Compendium 081914


Today's Focus: July Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for July this morning.


While total starts and permits bounced sharply in July, it was largely a retracement of the cumulative MoM declines recorded in May & June.  More importantly, however, the trend in the single family component remains middling and the trend in SF permits, up just +0.9% in July, continues to suggest minimal upside for forward starts. With single-family starts up just +2% YoY on average YTD vs. multi-family up 21%, the concentration in construction activity, and the predominate driver of the recovery in starts, remains well defined. 


  • Total Starts:  Total housing starts re-breached the 1MM level, increasing +15.7% MoM (+148K) to +1093K SAAR with June revised +5.8% to 945K from 893K SAAR.  Multi-family, which led the May/June declines, drove the July upside.    
    • Single Family:  SF starts rose +50K MoM (+8.3%) to 656K, the highest level YTD
    • Multi Family:  MF starts rose +98K MoM (+28.9%) to 437K  
  • Total Permits:  Total Permits rose +79K MoM (+8.1%) to 1052K with the +73K increase in multi-family carrying the increase.   The gain in total permits in July, driven principally by multifamily, is suggestive of a decent, MF-heavy print for August starts. 
    • SF Permits:  Single Family permits rose just 0.9% MoM (+6K) to 640K.  The trend in permits continues to suggest minimal upside for the forward starts data
    • MF Permits:  Multi-family permits rose +73K (+21.5%) in July to 412K (after dropping -72K and -51K in May and June, respectively)


NAHB HMI vs SF Starts:  Yesterday’s sequential increase in the NAHB HMI accords with the rise in SF starts in July but the burgeoning disconnect between builder confidence (driven by optimism more than sales) and SF construction activity over the last few months remains stark.  Moreover – in a further muddling of the crosswalk between the two series – while the Midwest sat as the singular source of strength in the regional builder confidence data, it was the lone source of weakness in the Census data with single-family starts declining -6.8% MoM.       


As a reminder, there are three factors principally responsible for the ongoing weak performance for housing. First, QM rules that took effect early this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.


Multi-family Remains the Driver of New Construction Activity - NAHB vs SF Starts


Multi-family Remains the Driver of New Construction Activity - SF Starts   Permits TTM


Multi-family Remains the Driver of New Construction Activity - SF Starts   Permits LT


Multi-family Remains the Driver of New Construction Activity - MF Starts   Permits TTM


Multi-family Remains the Driver of New Construction Activity - MF Starts   Permits LT


Multi-family Remains the Driver of New Construction Activity - Total Starts LT



About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 



Joshua Steiner, CFA


Christian B. Drake


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Keith's Macro Notebook 8/19: ITALY COMMODITIES RUSSELL 2000

VIDEO: Upside Opportunity for This Small Cap Semi Stock? $IRF

LEISURE LETTER (08/19/2014)

Tickers: MGM, LVS


  • Aug 19-21:  Hedgeye Cruise Pricing Update
  • Aug 19:  Galaxy Entertainment Group 2Q results 5 am
  • Aug 26:  Horseshoe Baltimore Opening
  • Aug 27:  BYI 2Q earnings
  • Aug 28:  Hollywood Dayton Raceway Opening
  • Sept 1/2:  Revel closes


MCP:PH & BEL:PM – Melco Crown (Philippines) Resorts Corp announced a partnership with The Ault Group, a U.S.-based nightclub-consulting firm led by established club operator Michael Van Cleef Ault. The deal will bring two of Ault Group’s nightclub brands – Pangaea and Chaos – into the City of Dreams Manila casino resort. Pangea would be able to host up to 400 guests a night in more than 730 square metres (7,858 square feet) of space, including VIP areas. The Chaos nightclub will feature a dance club and private karaoke rooms and will be spread across two levels covering approximately  3,000 square metres (32,392 square feet) with capacity for more than 2,000 customers. Both clubs will be situated in City of Dreams Manila’s Fortune Egg, described by Melco Crown Philippines as “an architecturally-unique dome-like structure, which will be accented with creative exterior lighting design

Takeaway: Nightclubs are a more popular form of entertainment in Manila than Macau.


GENS:SP (GGRAsia) The governor of Jeju Island, Won Hee-ryong, is resisting the construction of a casino resort by Ramjung Jeju Development Corp, a joint venture between mainland China real estate developer Landing International Development Ltd and Genting Singapore Plc. Mr Won ordered a review of the project for allegedly having exceeded the agreed planning permission. The comments by Mr Won, a member of the ruling New Frontier Party, clash with last week's announcement by the South Korean national government that it planned to reduce regulatory barriers faced by developers of integrated resorts that contain gambling facilities.

Takeaway: Could it be that the Governor of Jeju Island Mr. Won simply wants greater concessions and revenue sharing?


GTK:IM – as expected, the State of Illinois cancelled its contract with its lottery manager (Northstar, owned by Gtech) seven years ahead of schedule for failing to meet financial targets. 

Takeaway: Illinois is not the easist state to conduct business. 


MGM (Bloomberg) CEO Jim Murren toured Tokyo's Tsukiji fish market in March and is considering the 57 acre location as a potential integrated resort site. Tokyo may sell the property after the market relocates. The relocation is due to the preparation for the Tokyo Olympics in 2020 as the road to the Olympic village is currently planned to pass directly under the fish market.  Land prices in the Tsukiji area cost about 1.39 million yen per square meter, while the cost of property in Odaiba, on reclaimed land in Tokyo Bay, is about 956,000 yen per square meter. Ed Bowers, MGM’s senior vice president for global gaming development, said the company would need at least 30 acres to build a casino resort.

Takeaway: Pulling out all stops to find a suitable site. In Springfield the company considered three different locations prior to settling on their current location.


LVS & 1928:HK (Macau Daily Times) Sylvester Stallone and Arnold Schwarzenegger, will be in Macau on Friday to attend Asia’s only VIP screening event for the opening of “The Expendables 3” according to the Venetian Macao. The integrated resort is hosting the event in celebration of its seventh anniversary. The VIP screening for the action film will take place in the 1,800 seat Venetian Theater.

Takeaway: Officials in Macau cite such events as an acknowledgement of the increasing role Asia (and China) play in the global entertainment business. Venetian, as always, leading the way in non-gaming entertainment.


HOT - announced the Sheraton Centre Toronto Hotel will under go a $90 million renovation of all 1,371 guest rooms and suites to debut in 2015. The completed renovation will include full guestroom and suite refurbishment, as well as replacement of all floor and wall finishes in public corridors and hallways. As a part of the re-design, the hotel will add two new guest rooms bringing the total room count up to 1,373. After completion of the renovation all guestrooms and suites will feature new case goods, seating, lighting, mirrors and window treatments.

Takeaway: As one of the larger "owned" hotels, could this announcement signal HOT was unable to sell this asset?



Macau Chief Executive to Operators – (Macau Business Daily) In an effort to support Macau's small and medium enterprises, Chief Executive Fernando Chui Sai On said, once he is re-elected, he will try to make gaming companies and government departments buy supplies that are made in Macau, whenever possible.

Takeaway: This is a very concerning statement to us because we believe such a policy would be a negative on margins and could cause inflation.


Macau 24 Hour Border Crossing (Macau Daily Times) The Macau delegate of the Chinese National People’s Congress, Liu Yiliang, suggested the mainland authorities are considering opening the border checkpoint at the Zhuhai-Macau Cross Border Industrial Zone to mainland non-resident workers between midnight and 7 a.m. However, he suggested such a proposal involved altering the function of the zone, which would require the approval of the central government.

Takeaway: While discussed as a positive for workers, a 24 hour border checkpoint would also benefit Macau gaming operations.


Meadowland Casino (NY TImes) The Meadowland Regional Chamber of Commerce is touting recent poll results (76% of 93 respondents said they preferred the East Rutherford complex over other destinations, including Sussex County/Vernon Valley and the Jersey City waterfront) to renew its call for a redevelopment of the Meadowlands Sports Complex. A 3-year-old version of the plan calls for a 130,000-square-foot casino with 100 table games, 3,000 slot positions and an on-site hotel. The chamber says that it could be the most successful casino in the world, sitting northeast of MetLife Stadium, next to the planned American Dream shopping mall (the previously failed Mills Meadowlands Xanadu complex with an indoor ski hill) water park and amusement park.

Takeaway: Everybody wants in on the action. Poor, poor, pitiful Atlantic City.


Atlantic City's Showboat – various media outlet report Atlantic Properties Group is interested in buying Showboat and discussions between Atlantic Properties and Caesars (CZR) are ongoing. 

Takeaway: Given the on-going cost of maintaining a shuttered property versus cash in hand, we'd take some, any cash.


Aussie VIP Traction (Bloomberg) Crown Resorts Ltd has spent US$100 million (MOP800 million) on improving its fleet of private jets. Sydney casino operator Echo Entertainment Group Ltd is considering buying a golf course for another casino-resort, near Brisbane. As such, gaming operators are reinvesting heavily into programs aimed at attracting Chinese gamblers to Australia's casinos rather than casinos in Macau.

Takeaway: Oz - is this where the Chinese VIPs are gambling?


Iceland Volcanic Activity Prompts Warning – Iceland warned airlines that there may be an eruption at one of the island’s largest volcanoes located underneath Vatnajokull, Europe’s biggest glacier. The alert level at Bardarbunga was raised to “orange,” indicating “heightened or escalating unrest with increased potential of eruption,” following a swarm of earthquakes over the past 48-72 hours. 

Takeaway: Recall the April 2010 eruptions of Eyjafjallajoikull, while small by comparison, resulted in a massive ash cloud covering a large area of norther Europe which in turn disrupted and cancelled most air traffic from April 14-20 for 20 countries and affected about 10 million travelers. 

Lodging GSA Releases New Per Diem Rates for FY 2015

Since FY 2005, Government Services Agency rates have been based on Average Daily Rate (ADR) data from the lodging industry, which GSA obtains through a contract with a leading provider of lodging industry data.  


As in previous years, GSA still uses:

  • Only "fire safe" properties; GSA is required by law to use only properties that are certified as being in compliance with the Hotel & Motel Fire Safety Act of 1990.
  • Properties that fall within the mid-price range.
  • Data from the prior 12-month period. For FY 2015, this is from April 2013 through March 2014;
  • Business travel week data (Monday through Thursday)

Of note, the GSA per diems for

  • New York City:  $304/night Oct, Nov & Dec 2014; $197/night Jan & Feb, $268/night Mar - June, $235/night for July & Aug and $304/night for Sept 2015 while the meal per diem is $71/day. 
  • Washington DC:  $222/night in Oct, $177/night Nov & Dec 2014 as well as Jan & Feb 2015; $229/night March - June; $162/night July & Aug; and $222/night in September 2015 while the meal per diem is $71/day. 

Full details can be found here.


Takeaway: A modest positive for lodging but the lack of GSA rate growth may overhang corporate group negotiations currently in progress.


Cruise Industry in the Caribbean (Cruise Critic) In the 2014 cruise season, 235 ships, with more than 367,000 beds sail Caribbean itineraries up from 212 ships in 2011, according to Cruise Line International Association.  And 2015 looks to have even more Caribbean capacity, as 239 ships with a total of 378,256 beds are scheduled. The glut of ships this year forced many lines to drop their prices to fill cabins, particularly during the summer and fall low season. On Cruise Critic's Find-A-Cruise tool, eight-night Eastern Caribbean trips in September cost as little as $41 per night. A week on the world's biggest cruise ship, Royal Caribbean's Allure of the Seas, can be booked throughout the fall for less than $100 a night.

Takeaway: Good for Caribbean cruise passengers, not so good for cruise line operators.  Stay tuned, the Hedgeye GLL team will have an update to our proprietary cruise pricing survey shortly.


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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