Takeaway: Hedgeye's Brian McGough remains the bull on Restoration Hardware.
Despite last week’s revenues disappointment, Retail sector head Brian McGough sees Restoration Hardware (RH) as the one stock in his sector that might realistically double over the coming 12-18 months. In fact, McGough thinks revenues is one area where management have their hand firmly on the controls.
Last week, when the disappointing number was released, McGough wrote “if RH didn’t have a shift in source book timing, the stock would be up $10 at this point.” McGough is being bombarded with questions about this quarter’s revenues drop, but Wall Street’s microscopic quarter-by-quarter view shouldn’t blind us to the telescopic view. The company is pulling off one of the biggest real estate transformations the Retail landscape has seen in a decade. At the same time, it pares down reinvents its Source Book strategy, and doubles its product assortment from a year-ago (while simultaneously redesigning floorsets in all its stores).
Guidance calls for a meaningful acceleration on the top line in the back half of the year – up 600bps from the first half of 2014. With inventory and deferred revenue (custom orders and orders in transit) up 35% year over year, we have confidence that RH will hit back half revenue estimates. Wall Street’s disappointment over the second quarter revenue miss is reflected in a stock price that dropped a few points since the print – closing yesterday at $77.05.
McGough has long-term confidence in RH management’s ability to manage the increasing complexity as the business grows and transforms. If he’s right, the stock could double in the next 12-18 months. And he thinks the stock could then double again over the following 12-18 months.
That would be worth the wait.
Tickers: LVS, MGM, RLJ, FCH, CCL
AGI:PM & 678:HK – (GGRAsia) Alliance Global Group Inc noted the first phase of its US$1.1-billion Manila casino project called Resorts World Bayshore (RWB) would be completed by 2018 with construction set to begin within 90 days. RWB will be the fourth casino operator to open in Pagcor Entertainment City. RWB will include 3 luxury hotels (Okura, Westin Hotels and Resorts, and a third brand yet to be finalized) offering more than 800 rooms, a retail component, a theater, and the casino. The development of Resorts World Bayshore is under Resorts World Bayshore City Inc., soon to be owned by AGI unit Travellers International Hotel Group Inc. Travellers is a joint venture with Genting Hong Kong Ltd., which is also the developer of Resorts World Manila in Pasay City, also currently undergoing an expansion program.
Takeaway: The build out of Manila as a gambling and entertainment destination continues. GGR growth rates certainly supports it.
BEL:PM – (GGRAsia) Philippine casino investor Belle Corp said in a regulatory filing on Monday that 3.36 billion shares in Premium Leisure Corp that it already owns will be listed with the Philippine Stock Exchange “some time this week”.
Premium Leisure (formerly known as Sinophil Corp) got regulatory approval to change its name a fortnight ago. Premium Leisure is reportedly pre-marketing a follow-on share offering to expand its investor base.
Takeaway: Very convenient timing as CLSA is the book runner for the placement and CLSA is currently hosting its Investor Forum in Hong Kong this week.
LVS – EVP and President of Global Gaming Operations at Las Vegas Sands Rob Goldstein and his wife listed for sale their Southampton NY compound for $28 million. The Goldsteins acquired the property in 2007 for $14.7 million.
Takeaway: Is it possible Mr. Goldstein will be assuming greater responsibilities within the enterprise and therefore won't have the time to relax and utilize the property? Given the gaming revenue weakness across Macau and Singapore as well as Mr. Leven's imminent retirement, we believe this to be the case.
MGM & 2282:HK – (Macau Business & Macau Daily Times) A group of about 200 casino workers from MGM China met with representatives from the city’s Labor Affairs Bureau to complain about the company’s pay and benefit policies and demand better terms of employment. Workers complained the company will allocate a disproportionate number of labor-intensive live gaming tables to new smoking rooms, and use more electronic gaming machines on the casino main floor – some of these machines allow a single dealer to serve many more players than traditional table games.
Takeaway: Labor battles continue. Croupiers and floor attendants view their role as "highly skilled" despite the entry level nature of such roles.
3918:HK NagaCorp – (GGRAsia) informed shareholders via HKSE filing, NagaCorp Ltd, the operator of the NagaWorld casino resort in Phnom Penh, Cambodia, says it has commissioned “an independent professional party to review the internal controls of the company and its subsidiaries...with a focus on anti-money laundering”. NagaCorp also said it had engaged another advisor called Political and Economic Risk Consultancy Ltd (PERC), “to assess the investment risks in Cambodia”. The consultant said in its findings published in NagaCorp’s Monday filing, that on a scale of 0 to 10 – with 10 being the greatest risk – its latest survey gives Cambodia an overall risk grade of 5.85.
Takeaway: Chairman McNally drawing upon his twenty-four years of service with the Federal Bureau of Investigation to help keep NagaCorp in the clear.
RLJ – announced that it has acquired the 215-room DoubleTree Grand Key Resort located in Key West, FL for a purchase price of $77.0 million, or approximately $358,000 per key.
Takeaway: Key West a hot market for tourism as well as hotel transactions.
FCH – sold its 446-room Holiday Inn-Toronto Airport and 221-room Embassy Suites Hotel-Indianapolis North for aggregate gross proceeds of $29M in separate transactions.
Takeaway: Selling assets = right sizing and focusing the portfolio as well as paying down debt
CCL – (Cruise Critic) Princess Cruises canceled Sea Princess' 14-night Fremantle to Brisbane cruise due to 'technical difficulties'. The ship, after arriving in Fremantle on Saturday for repairs and following a cruise from Singapore, experienced problems that affected its ability to cruise at full speed on recent itineraries. While in port, engineers discovered a second, separate technical, issue and Princess decided to bring the ship to dry dock where all repairs will be carried out. Princess gave all passengers a full refund of their cruise fare plus a 100% future cruise credit.
Takeaway: Ironic and unfortunate timing as The Sunday Times reported that according to passengers, up to 400 people disembarked the same ship on Sunday morning morning with norovirus - which resulted in the vessel getting nicknamed "Pandemic Princess".
MAR – President of the Americas Division, David Grissen acquired 16,000 shares via stock option (with an expiration date of April 27, 2015) for $15.00/share and sold the same shares at an average price/share of $71.09. Additionall, Mr. Grissen acquired 9,840 shares via stock option (with an expiration date of February 10, 2015) for $30.31/share and sold these share at an average price/share of $71.18. Mr. Grissen now directly owns 54,755 shares of the company’s stock and 1,785 shares via 401(k).
T8 signal lowered as Typhoon Kalmaegi makes landfall in China (Macau News)
Issued warning: "Kalmaegi has made landfall over Wenchang, Hainan Island, and will continue to move further away from Hong Kong. Its associated squally showers will still affect Hong Kong intermittently. Although Kalmaegi is moving away, occasional gales will still affect Macau."
Takeaway: This won't make things better for Macau in September
Macau Safe Haven for Russian Capital – (Macau Business) A risk consultant says Russian investors regard Macau as a safe place to put their money, out of the reach of US and EU sanctions imposed on Russia for its interference in Ukraine, Business Daily reports.
Takeaway: Unfortunately, not the headline Macau needs at this moment.
Atlantic City - Donald Trump tweets considering saving Trump Plaza and Taj Mahal
Takeaway: Vulture buyer in the market
Lodging 2015 Corporate Rates – NYU forecasts big bump in 2015 corporate rates. The emerging outlook for 2015 corporate contract room rates in the United States is expected to increase the most since NYU started preparing this forecast with a national average increase of 5.5% to 6.5%.
Takeaway: A stronger than expected tailwind for the lodging cycle and 2015 outlook.
Global Tourism – International tourist arrivals grew by 4.6% in the first half of 2014 according to the latest UNWTO World Tourism Barometer. Destinations worldwide received some 517 million international tourists between January and June 2014, 22 million more than in the same period of 2013. Growth was strongest in the Americas (+6%) followed by Asia and the Pacific and Europe (both at +5%). By subregion, South Asia and Northern Europe (both +8%) were the best performers, together with North-East Asia and Southern Mediterranean Europe (both +7%).
Takeaway: More support for the strengthening lodging cycle.
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.
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.
Takeaway: ICSC - 3% growth simply 'ok'. DKS loses two executives. URBN feeling the media heat. WWW shuffling the deck. M outlines e-comm strategy.
EVENTS TO WATCH
PIR - Earnings Call: 4:30pm
RAD - Earnings Call: 8:30am
Takeaway: This marks the second biggest sequential deceleration we've seen in these numbers all year -- +3.0% from +4.0%. The irony is that if we turned the clock back six months, the industry would have given anything for a 3% comp. Now, after the huge numbers we've been seeing for the past quarter, a 3% reading is simply 'ok'.
DKS - Departure Of COO and EVP of Merchandising
Takeaway: When is it a good sign when both the COO and head of Merchandising are fired/pushed out/step down on the same day? Never. The reality is that Dick's problems go far beyond these two individuals...but accountability has to start somewhere. We wouldn't touch this stock unless it was on the short side.
URBN - Urban Outfitters Features "Vintage" Red-Stained Kent State Sweatshirt
Takeaway: We're all for pushing the envelope as to what is considered socially acceptable from a product and brand messaging standpoint. But this is definitely taking it too far. But let's be real, URBN isn't exactly knocking the cover off the ball right now. Even negative attention is good attention at this point. That's probably what the Urban merchants thought when they braced for the fallout from this product launch.
WWW - Wolverine Worldwide Names Rick Blackshaw President of Sperry Top-Sider and Chris Lindner President of Keds
Takeaway: The swap between Sperry and Keds is puzzling at face value. But the bigger point is that this is not a first for WWW. It is part of the company's DNA. Very few executives in the WWW organization have stayed with one brand throughout their whole tenure. Now WWW is applying the same philosophy to the acquired PLG brands, which makes perfect sense. This is NOT a sign of things going wrong at Sperry or Keds, which we're inclined to think that WWW/Sperry-haters will try to argue. We'll take the other side of that any day.
M - Macy’s, Inc. Outlines New Developments in Omnichannel Strategy and Technology
Takeaway: Over the past eight years, M has grown its online business at a 32% CAGR, 2nd only to KSS. That channel now accounts for about 15% of total sales - tops in the pier group. Macy’s is the best in the business at driving its financial model, and we’ve got to respect that. But when all is said and done, we simply have a tough time justifying that there’s enough room to evolve the financial model into something that’s meaningfully better than we see today. Margins are tapped and costs are accelerating. That’s not in expectations. But, we have to give credit where credit is due. In this release, M outlines 12 initiatives it has in the works to enhance both the online and in-store shopping experience through technology. Some of them echo the rest of the industry, particularly buy online pick up in store and same day delivery, but for the most part M is leading the charge when it comes to technological innovation.
ASOS- Trading Statement for the three months ended 31 August 2014
RSH - RadioShack Appoints Interim Chief Financial Officer
AMZN - Amazon Begins Login and Pay in Europe
SHLD - Sears Borrows $400 Million From Lampert’s ESL Investments
ANN - ANN INC. Responds to Engine Capital LP and Red Alder LLC
TJX - T.J.Maxx enlists stars for style campaign
GME - GameStop to exit Spanish market
Here’s an excerpt from Hedgeye CEO Keith McCullough’s morning call to institutional subscribers.
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