LEISURE LETTER (08/28/2014)

Tickers:  LVS, 880:HK, CHDN, RCL


  • Aug 28:  Hollywood Dayton Raceway opens
  • Sept 1/2:  Revel closes
  • Aug 28- Sept 2: July Nevada gaming revenues released


LVS – Metals Trader’s Brother Sued by Sands Over Gambling Debt(Bloomberg) 

Chen Jilong, a so-called premium casino player at Marina Bay Sands Pte, owes S$1.88 million ($1.5 million) and has refused to make payment, according to a lawsuit filed with the Singapore High Court earlier this month. The casino gave him S$3 million credit in November 2011, according to court papers.

Takeaway:  Will we see tighter credit requirements for premium/VIP players?


880:HK (Macau Business Daily) SJM casino workers from Grand Lisboa say they will clock in for work on Saturday morning, as usual. But they won’t deal cards to punters at their tables.  Some 1,000 dealers from Grand Lisboa are expected to go on strike at their place of work from Saturday morning, until Sociedade de Jogos de Macau (SJM Holdings Ltd) takes action to resolve their demands

Takeaway:  Labor issues persist



RCL (TTG)RCL CEO Richard Fain insisted the “price value” for Royal Caribbean’s latest offering was “astronomical”. He added that although he expected the new ship to be “nicely profitable with good margins”, he still believed prices for the lines’ cruises were currently too low.  “The UK is still a young market – not as much as Asia, but still relatively young, and it has a lot of growth potential,” he added.

Takeaway:  We agree with Fain.  Quantum will give RCL a nice boost but the core RC fleet is struggling with pricing in the Caribbean. 


Japan – Toru Mihara, a professor at the Osaka University of Commerce who helped lawmakers draft the casino bill, told reporters the government should tackle the issue of problem gambling through counselling and other means, and not by imposing a ban on local gamblers.  "I would estimate that about 80% of all visitors will be Japanese. The remainder will be foreigners," he said.


Separately, Mihara said that given the likelihood that the government will not submit other important legislation which would be given discussion priority, it’s highly likely that the casino bill will be passed by November.  Japan’s parliament is expected to convene for its fall session at the end of September and meet through December. The bill, called a promotion law, wouldn’t immediately lift the ban on casino gambling.  It would direct the government to craft another law to give the final go-ahead.

Takeaway:  Looking good for the fall...


Chui (Macau News) – Macau CEO Fernando Chui Sai On said that his second-term government would study the setting-up of a mechanism for non-local workers to “bow out” during an economic downturn to ensure that locals will have jobs.  He also urged citizens to have confidence in his government’s determination to guarantee local workers’ benefits and rights which would never be allowed to be undermined by non-local workers.

Takeaway:  Chui may need to be more flexible with foreign labor if the new Cotai casinos cannot find enough local croupiers or casino supervisors. 


Jobless (DSEC)  – Macau’s unemployment rate for May-July stood at 1.7%.  It has remained at 1.7% since Nov 2013.

Takeaway:  Persistently low unemployment increases upward pressure on labor and vulnerability of casinos to labor demands. 


Regionals & REIT Conversion (LVRJ) Reporter Howard Stutz is again fanning the flames of potential REIT conversions for both BYD and PNK with a recent story highlighting how various activist investors believe the real estate owned by Pinnacle Entertainment and Boyd Gaming Corp. is key to unlocking hidden value within the Las Vegas-based regional gaming operators. 

Takeaway: Mr. Stutz relies on dated news for his story which is only worth mentioning because based on our March 18, 2014 "EXPERT CALL: THE REIT STRUCTURE: A VIABLE ALTERNATIVE FOR BYD AND OTHERS" we have held the position a tax-free REIT spin-offs by BYD and PNK are virtually impossible to effectuate.  A taxable spin is possible and would be value creating, in our view.


Affinity Gaming Names New CEO – Las Vegas-based casino operator Affinity Gaming, a portfolio company of Z Capital Partners, has appointed Michael Silberling as CEO. Silberling will also be added to the board of directors. Previously, he worked at Caesars Entertainment Corp. Also joining the board are James Zenni, Andrei Scrivens and James Cacioppo. Affinity Gaming is a diversified casino gaming company headquartered in Las Vegas, Nevada. The Company’s casino operations consist of 11 casinos in four states, five of which are located in Nevada, three in Colorado, in Missouri and one in Iowa. 


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.

RH – Quick Take On WSM Disappointment

Takeaway: We think RH is 100% on track. The bad WSM print matters at face value, but the lion’s share simply does not apply to RH.

Overall, WSM’s print is a factor we won’t ignore as it relates to RH. Even though the customer mix is very different, WSM is RH’s closest publicly-traded comp. The reality is that this is an environment where a poor quality retailer (M, KSS, TGT) could hit numbers with horrible quality earnings and the stock trades up, where great (and higher multiple) companies smoke estimates but say one word wrong and the stock is down 10-20% (KATE). That’s our greatest concern near-term. But for so many reasons, after taking in this data point we don’t think this WSM print can be extrapolated to RH. We think RH will beat the quarter in two weeks, and more importantly will ultimately print $2.70 this year versus the Street at $2.30. We’re still at $11 in 2018, and think that this stock will be well in excess of $200. We still think RH is perhaps the most powerful story in retail. A bad quarter at WSM does not change that.


A few points…


1) The WSM concept that overlaps most with RH is West Elm. Though it is only 12% of sales, it comped 16.7%, and accelerated by 140bp on a 2-year basis.


2) WSM called out ‘seasonal’ product as being weak. That’s little concern for RH. Less than 10% of the RH assortment is considered ‘seasonal’. WSM is more tied to seasonal promotions in the first nine months of the year. That’s not an issue for RH.


3) Let’s not confuse ‘seasonal’ for ‘outdoor’. People familiar with the RH story know that so-called ‘outdoor space’ is critical to the economic model of its new design galleries. Yes, that’s where they sell outdoor furniture – but it’s not what WSM is referring to as ‘seasonal’. A $3,000 teak outdoor dining table isn’t exactly what WSM was referring to as being promotional. It simply does not compete much with RH’s core.


4) Weakness that WSM might be seeing in kitchen and tabletop is nothing compared to what it will see when RH launches its Kitchen business in the Spring of 2015.


5) To put these stories in context, RH square footage growth is accelerating from -5% to over 40% in just two years. WSM, on the flip side, is shrinking its US store base in the Pottery Barn and Williams-Sonoma concepts. And with the exception of West Elm, its only new sq. ft. is coming outside of the US. In total WSM has 1.5% unit growth and 3.7% sq. ft. growth for the year. There’s very little leverage left to the model from unit growth.


6) Commentary towards the end of the WSM call made it seem like they had a deferred revenue issue. It sounded to us like there wasn’t inventory at the end of the quarter to meet demand in things that people actually wanted like furniture as opposed to holiday decorations. Again, this comes back to mix shift towards seasonal items that RH does not sell.


Takeaway: Initial claims put up their 14th week in a row of ~10% y/y improvement on a rolling NSA basis.

Claims Data Shows Steady Y/Y Improvement

The last couple weeks have seen little change in trend from the initial jobless claims data. Overall, the number of people losing their jobs continues to decline at a rate of roughly 10% year-over-year. this has been the trend now for the last ~14 weeks. This week's print showed a 10.3% y/y improvement, which was slightly better than last week's 9.6% improvement and down a bit from the 11% improvement two weeks ago. 


As we've highlighted recently, when initial claims (rolling, SA) have reached the level they're currently at the broader market index (S&P 500) has gone on to advance for another 12-18 months - at least, this has been the case in the last few cycles. As Mark Twain famously said, history never repeats, but it does rhyme.


The Data

Prior to revision, initial jobless claims fell 0k to 298k from 298k WoW, as the prior week's number was revised up by 1k to 299k.


The headline (unrevised) number shows claims were lower by 1k WoW. 

Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25k WoW to 299.75k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -9.6%


























Yield Spreads

The 2-10 spread fell -11 basis points WoW to 185 bps. 3Q14TD, the 2-10 spread is averaging 201 bps, which is lower by -20 bps relative to 2Q14.







Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

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BKW/THI Call Replay & Summary

Today we held an informative call with John Barker, former Senior VP and CCO of Wendy’s, who lived through the merger of WEN/THI.  A replay of the call can be accessed below.


Replay: BKW/THI Merger Thought Leader Call

Summary Bullets

Can you provide some historical context on the prior WEN/THI merger?

  • Tim’s is a unique brand; very tied into its communities
  • There was a lot of excitement about WEN/THI coming together
  • 1992 first time they were put together under the same roof
  • In his 10 years of association with the brand, the phrase “iconic” would often be thrown around when referring to Tim’s
  • Think it is a spot on description
  • No major restaurant brand is tied as closely to its community or country than Tim Hortons
  • Well-run mom and pop shop; about 2-3 restaurants per franchisee back in the mid-1990’s through mid-2000’s
  • Franchisees were in love with the brand; you don’t see that everywhere
  • Very solid business in Canada; the new unit growth was phenomenal from 1
  • Avg. same-store sales over those ten years was 7.5%
  • Wendy’s was very fortunate to pick up the chain at such a good price


What did the WEN/THI merger accomplish?

  • The WEN/THI merger worked for shareholders
  • Tremendous value was created by the time of the IPO and spinoff
  • It was a good relationship from a value creation standpoint
  • From a business standpoint, combination units never really took off on a national level
  • One business was very Canadian centric, the other was very U.S. centric
  • The two brands at that time felt that there was competition, because the franchisees see it that way


Will this deal help accelerate growth for THI?

  • This deal can bring access to different types of franchisees for Tim Hortons
  • It could require a different approach to running the brand
  • Whether or not it will be as successful as it is in Canada remains to be seen
  • The model they currently have in Canada works


Did THI stick to the mom and pop franchising model when dealing with WEN?

  • For the most part, yes
  • If THI wants to accelerate growth, they will need to change the culture of the business
  • This is a multi-year process
  • If they had large franchisees like they have in the Burger King business, that could be different


What other hurdles does THI face in building the brand abroad?

  • Good brand awareness just South of the Canadian border
  • But anywhere else, the brand doesn’t have much recognition
  • Customers elsewhere don’t understand Tim’s as a brand, they only understand the functional needs of it
  • Buffalo, Columbus, Michigan – as they immersed themselves more the in the local communities and the brand became better understood, it became more successful
  • It would be difficult to accelerate growth under another franchise model
  • THI uses a grassroots approach to building its business


Is there potential to grow the THI business outside of the U.S./CAN?

  • They didn’t need THI to grow internationally when it was with WEN because it was growing so strong in Canada
  • The functional delivery of the brand is just fine
  • The delivery of products would probably have to be adjusted to some degree, because many of the products in Canada are very unique and they resonate with customers there
  • How you do this internationally, no one really knows
  • Tim’s was an R&D juggernaut back in the day


What is the risk of 3G cutting back on franchisee support for THI?

  • This is something they must be very careful about
  • WEN never tried to change THI’s operations
  • THI has a very deep commitment to training, R&D and product delivery
  • National marketing in Canada was brilliant, development and real estate expertise in Canada was best-in-class
  • If you’re going to grow rapidly, you need to replicate these things


THI is already a fairly lean organization – will 3G find cost cutting opportunities there?

  • Comes down to how much synergy they’ll try to create across the two brands
  • WEN was careful to keep the brands separate
  • They shared services at the very highest level only
  • Two different approaches to the businesses
  • Cost cutting buckets might exist, but they’re likely small


Do you believe the motivation behind the deal isn’t tax-based?

  • There is certainly an opportunity to benefit from that
  • This has created significant value already based on the stocks’ reactions


How will this be perceived in the franchise community?

  • THI has been through this once already
  • Didn’t have that much interaction with the WEN brand
  • They didn’t really have a strong opinion about being owned by a U.S. company
  • But since 2005 to today, franchisees are a little more sophisticated and they are probably paying attention to this pretty carefully
  • They will not want their brand to change, particularly the way it’s operated


Has BKW created a firestorm of backlash against the brand?

  • Social media is often blown out of proportion
  • There could be an impact for a little while, but these are things that consumers typically get over
  • Could be a one to two day phenomenon
  • A lot of pride in the THI brand, so it’s a little different with that brand
  • This should be watched very carefully
  • On the political side, this is a very difficult position for politicians to be in as well as people who manage companies because you have a division of responsibilities
  • But you are, by your charter, supposed to pursue shareholder value creation


What if BKW sees an extended period of declining sales due to this?

  • Daily sales should be monitored closely
  • BKW could pull back on the deal, but sincerely doubt that will occur
  • You can do a lot to monitor social media
  • Most big brands have these capabilities


How difficult is it to bring two companies with distinctly different cultures together?

  • It’s a big issue because restaurant companies have distinct cultures
  • Culture at THI is deeply ingrained; they certainly won’t want to change
  • WEN decided early on to let the THI culture carry on
  • The only place it blended was at the senior level


Will the THI Chairman stick around much longer?

  • Don’t have any insight into that
  • It would be wise for BKW to hold on to some of the high-end talent from THI, no matter how they structure the organization
  • Smart companies always figure out a way to do that
  • THI has been a juggernaut over a long period of time
  • If we start to see leakage of people at the company, it would be concerning
  • Franchisees will be watching this pretty closely


Howard Penney

Managing Director


Fred Masotta


Seeing Red in Europe

Client Talking Points


We shorted France yesterday in Real-Time Alerts, and European equities are down across the board this morning. The bull thesis on Europe has shifted from “Growth is accelerating” to “The ECB is easing.” The problem with easing is that a lot of large sell-side firms are projecting an ECB rate cut next week, and interest rates are already reflecting this.


Chinese equities sold off late in the day yesterday, somewhat coincidental with Europeans returning to their trading desks.  Chinese industrial profits came in at 13.5% in July, a sequential decline from the June number (+17%).


Interesting note regarding outstanding mortgage debt: A CFPB study shows 30% of Americans 65 or older have mortgage debt (up from 22% in 2001). Loan balances increased to $79k from $43k.  In aggregate, what you have is the retirement-age class seeing a meaningful increase in both mortgage debt and the amount of outstanding debt.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


The level of activism in the restaurant industry has never been more rampant.  In the past year alone, we’ve seen CBRL, DAVE, DRI, BJRI and BOBE attract largely uninvited attention from these investors. BOBE has a long history of mismanagement, evidenced by flawed strategic rationale, an excessively bloated cost structure and severe underperformance relative to peers.  Fortunately, its poor operating performance presents a tremendous opportunity. After almost a year of pushing for change at Bob Evans, activist investor Sandell Asset Management is claiming a big victory. Activist investor Sandell won at least five seats on the board of the restaurant operator and food processor, based on preliminary results from the company’s annual shareholder meeting last week. This is precisely the sort of bullish catalyst that was central to our high conviction on BOBE.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

Three for the Road


New Test May Detect Organic Food Fraud: Is Your Produce Really Organic?: "nuclear magnetic resonance spectroscopy"



You can never cross the ocean until you have the courage to lose sight of the shore.

-Christopher Columbus


France is experiencing a 16-year low in housing starts.


Takeaway: We expect that July was solid with gaming revenues up 6-10% assuming normal hold.

Nevada should release gaming revenues this week



With another easy comparison, we are projecting YoY growth of 6-10% for Strip gaming revenues in July.  McCarran airport traffic increased 1.9% YoY, slightly below the year-to-date average, while taxi trips increased 2.4% in July.  Both statistics have proven to be significant predictors of gaming revenue growth.  


The comparison is easy as July 2013 experienced a 14% Yoy decline in GGR as baccarat volume dropped 16%.  The wildcard, as always, will be baccarat volume and table hold percentage.  For this analysis, we are using normal slot and table hold and baccarat volume growth of 20%.  


July growth should be in line with investor expectations but we would caution that the August comparison is difficult, up 20% in 2013.  August 2014 could show a meaningful decline in gaming revenues.