October 16, 2014

October 16, 2014 - Slide1



October 16, 2014 - Slide2

October 16, 2014 - Slide3

October 16, 2014 - Slide4




October 16, 2014 - Slide5

October 16, 2014 - Slide6 

October 16, 2014 - Slide7

October 16, 2014 - Slide8

October 16, 2014 - Slide9

October 16, 2014 - Slide10

October 16, 2014 - Slide11


Takeaway: Finally, an acknowledgement that premium mass margins under pressure. 2015 estimates way too high - any relief rally could be short lived

Slight Q3 miss from reduced Street numbers but conference call commentary the more important driver. Singapore disappointing.


LVS 3Q 2014 CONF CALL NOTES - lvs1


LVS 3Q 2014 CONF CALL NOTES - lvs2


Mr. Adelson:

  • Solid results despite VIP challenges
  • Return excess capital to shareholders
  • As confident today as ever been in long-term future of company
  • Strategic position - creators of large scale, convention based Integrated Resort
  • Over 80% of profits from Mass, less than 20% from VIP in Macau
  • Size of cash flows >$5 billion affords developments in new jurisdictions as well as return capital to shareholders


  • Adjusted property EBITDA increased 3.2% to $809.0 million, reflecting mass gaming and non‐gaming growth but a challenging VIP environment 
  • Growth in China continues
  • Mass still growing 15% in Macao, expect mass to grow for foreseeable future, remains supply constrained and supply driven market
  • Current gaming softness is cyclical and will reverse
  • Strategy has not changed
  • 18.2 million people visited in Q3, up 8.2% YoY
  • Hotel room optimization yielding results
  • Largest employer in Macau across any industry
  • Rising labor costs - more than happy to increase salaries, revenues will outpace labor costs


  • Normalized hold adjusted ebitda +$15 million to $367 million 
  • Bringing in more foreign Premium Mass customers
  • Japan and Korea envy MBS as model for IR development, most iconic IR in the world.
  • Mall at MBS remains a go to, must visit shopping mall across SE Asia

New Markets

Development opportunity parameters:
— Minimum of 20% return on total invested capital
— 25% ‐ 35% of total project costs to be funded with equity

— project financing to fund 65% ‐ 75% of total project costs



  • Progress being made, process continues.
  • Potential for IR, remain enthusiastic


  • Extensive time on the ground
  • Focused on Seoul
  • Willing to commit substantial capital in both Japan and Korea


  • Exploring a scaled IR opportunity

Return of Capital

  • Confidence in business, reliability of cash flow affords significant return to shareholders via share repurchase and dividends
  • Have sufficient capital for planning and developing new projects
  • Announce dividend increase of 30% to US$0.65/quarter beginning in Q1 2015.  Every intention to increase dividend in years ahead.
  • $300 million returned in Q3 via share repurchase activity, completed initial $2 billion repurchase authorization
  • Authorized additional $2 billion repurchase



Q: Profit margin assumptions for mass, premium mass (slide 21), what's behind the lowered assumptions?

  • Competitive mass pressures on premium mass, structural advantage in base mass, steadfast in 45%+ margin in base mass. Higher flow through, blended near 45%, expect flow through to rise. 
    • Hedgeye: premium mass issues should've been acknowledged on the Q2 conference call

Q: Smoking ban impact?

  • Not impacting any segment. Smoking areas utilized. Obedient society, go to smoking rooms and return to tables.

Q: Buyback target vs. opportunistic due to lower share price?

  • Programmatic in nature, no guideline. Board meetings over the coming weeks, likely similar to past, but any opportunity should revisit.

Q: CapEx pushed out at Parisian?

  • Parisian targeted opening date:  Partial vs. Complete? Full opening in March 2016, partial opening in November or December if government approves partial opening. 
    • Hedgeye: we'd put the over/under in Q2

Q: Premium Mass competition - continued to shift tables to premium mass, slow shift or move back to base mass?

  • Move tables based on market demand. Excess supply on VIP.

Q: Visitation strong but GGR decelerating, shift in rated customers?

  • Believe as new properties open with new infrastructure, GGR will grow. Confident base mass, mass mass will grow. 

Q: VIP side in Macau, difference in incremental margin, direct hold impact?

  • Margins on VIP are healthy and commission rates not going up.

Q: New share repurchase authorization, how fund - FCF, leverage?

  • Have not addressed yet, plenty of money, historically all cash for development & construction, now go out and get construction facility which will recover capital.

Q: Singapore - sacrificing role for profitability, how frame trade off?

  • Cognizant of atmosphere, remaining conservative, bearish on VIP in Singapore - highly concentrated, very thin market, very competitive with RWS and Philippines. Competitor (RWS) that has had monopoly in Malaysia, but still buying business - paying 1.7% to 1.8% but also paying for Premium Direct, VIP Direct.  MBS maintaining Macau commission levels. Moving player money is a challenge for MBS.

Q: Interest in Japan if locals excluded, change scope of project/investment?

  • Not interested in Japan or any other market if foreigners only.  In Korea, 16 foreigners only casinos cumulatively don't make what Kangwon makes as locals casino.  Foreigners only casinos don't receive sufficient visitation to support Integrated Resort, need locals.

Q: Golden Week, helped liquidity?

  • Can't talk about Golden Week due to Q4 event.

Q: Malls: interest in selling, use cash proceeds to buy back stock?

  • Too soon to sell, given 19%+ CAGR over past five quarters.
  • Still reprogramming the malls to increase sales and sales/sq. ft. 
  • Four Seasons Mall US$7k/sq. ft. 
  • Never sell when growing ~20% CAGR YoY.
  • Too much opportunity over the next few years.
  • Original plan to monetize at 4% cap rate 

Q: Margins

  • Premium mass mid 30%, base mass mid 40s%

Q: VIP improvement - what causes confidence/improvement?

  • Investigation of corruption is narrowed but not complete, so need to rethink but based on new information need greater clarification of narrow scope of on going crackdowns. So, unsure of VIP rebound at present time, could be 3 to 4 months, maybe by Q2 2015.  VIP for sure not going away.

Q: Parisian tables - formula?

  • Macau government will favor if have more non-gaming vs. gaming - especially if gaming exceeds 10% of total floor space. 

Q: Hold adjusted basis in Macau, EBITDA margin flat YoY - how hold margins flat, what add'l efforts to keep margin?

  • Mass margins will keep/sustain margins due to mass driven model.
  • But competitive set - unclear what competitors will do in Premium Mass
  • Margins up 110 bps on hold adjusted basis.

Macro Medley: 0 for (Quad#) 4

Takeaway: The global shift into quad #4 continues. There are pockets of fundamental strength domestically but we were 0 for 4 today.

QUAD #4:  We’ve been highlighting the emergent entry into Quad #4 (characterized by disinflation and decelerating growth) in our GIP model with regular frequency for over two months now.  We walked through the model in extended detail and our preferred positioning most recently here >> THE MARKET THINKS WE'RE IN QUAD#4...DO YOU? 


In short, you want to be long/OW the stuff that is working today (Bonds, Cash, large cap defensive yield) and short/UW its converse (high beta, small cap illiquidity and early cycle leverage)


Macro Medley: 0 for (Quad#) 4 - UNITED STATES


QUAD #4...GLOBALLY:  While we typically apply the model on a country by country basis, it generalizes to any regional or global aggregate.  In fact, the price consequences of a global shift into quad #4 are that much more acute. 


Looking across our global macro monitor – which tracks global growth & inflation trends -  growth and inflation estimate revision trends over the last quarter across both developed and EM markets have been almost universally negative.


Note: the table size/font is probably hard to read but simply observing the overwhelming prevalence of red (ie. negative growth/inflation estimate revisions trends) across countries/regions is sufficient for internalizing the prevailing global trend.   


Macro Medley: 0 for (Quad#) 4 - GMM 101514



DOMESTICALLY:  In discussing the September jobs report we summarized the shifting variables under the Fed's policy calculus in this way:   


ROW Growth Slowing + Global Disinflation Predominating + Domestic Wage Growth Decelerating + LFPR declining + Housing Slowing  vs. Strong Initial Claims + Solid NFP Gains + Declining Unemployment Rate + Accelerating Aggregate Income Growth


In brief, the domestic labor market (& mfg) and aggregate income growth continue to crest while wage growth and housing continue to flag, EU/Japan remain in discrete deceleration, EM economies suffer under strong dollar pressure and disinflation predominates. 


The left hand side of the equation has already pushed the Fed towards rhetorical dovishness. To the extent global quad #4 trends worsen, we import incremental disinflation and/or that ROW weakness spills over into the domestic macroeconomy, we can expect more of the same in terms of reactionary policy response.    


Unless this-time-is-different, relative exceptionalism (ie. sustained de-coupling) wins the day, it’s unlikely the US goes escape velocity in isolation. 


Indeed, inflation expectations continue to collapse, rate hike expectations are getting pushed out and, from a rate of change perspective, the domestic macro data has, on balance, been slowing.  


Macro Medley: 0 for (Quad#) 4 - 5Y BE


Macro Medley: 0 for (Quad#) 4 - Eco Summary Table 101514



0 for 4 TODAY:   We had a quadfecta of disappointing data this morning with Retail Sales, PPI, Empire Manufacturing & Mortgage Purchase Applications all deteriorating sequentially. 


  • Retail Sales:  The (expected) decline in auto sales and lower gas prices drove the bulk of the decline in Headline Retail sales with weakness in furniture and building materials sales exacerbating the drop.  Across the control group, declines in Food, Clothing and e-sales led the first M/M drop since January with the 1Y and 2Y ave growth rates decelerating as well.  Growth has been noteably choppy YTD (2nd chart below) and household income growth remains strong but the broad deceleration (11 of 13 industries reported decelerating growth) is noteworthy.
  • Mortgage Purchase Demand declined a modest -0.7% W/W after last week’s bounce above the 170-level on the index.  4Q is currently tracking +2.5% Q/Q with the YoY improving to -4.1% in the latest week.  Comps continue to ease significantly against 4Q13 and into 1Q next year as we lap the collective shock of rising rates, QM implementation, and FHA loan limit reductions. 
    • Refinance activity rose +10.6% W/W, on the back last week’s 5% rise, as rates retreated a full -10bps to 4.20%.  After dropping -13bps in the last two weeks, rates are now back at their lowest level YTD and the lowest level since June of last year. 
  • PPI:  Food and Energy/Gas led the -0.1% M/M decline in PPI-FD in September with both core and headline decelerating -20bps sequentially to +1.6% YoY.  The deceleration was not particularly surprising given the broad and expedited commodity price declines, but it does offer further. confirmatory evidence of our entre into quad 4.

 Macro Medley: 0 for (Quad#) 4 - Compendium 101514


Macro Medley: 0 for (Quad#) 4 - Retail Sales Control Group MoM  YoY  2Y


Macro Medley: 0 for (Quad#) 4 - Retail Sales Table Sept


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CARTOON OF THE DAY: SAFE WATERS - turbulence cartoon 10.15.2014


In this market selloff, investors should ride with Treasuries.



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Hedgeye CEO Keith McCullough talks with Maria Bartiromo of Fox Business about today’s market selloff.

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK

Takeaway: Retail Rolling. Tory testing Wall Street. Huge Nike knockoff lawsuit. LULU Swoosh gaffe. A worthy RH peer? McKnight finally gone from ZQK.



Hedgeye Department Store Black Book/Tomorrow -- Thursday October 16th 11amEST

In Thursday's Black Book, we dive into the industry's supply/demand balance, real estate profiles, category exposure and e-commerce margins.

Relevant tickers: JCP, M, KSS, DDS, JWN, SHLD, TGT, WMT, TJX, and GPS.

Call Details

Toll Free Number:

Direct Dial Number:

Conference Code: 693664#

Materials: CLICK HERE



Takeaway: We've been scratching our heads lately in looking at the strong ICSC numbers. This basket of 80 retailers shows 3.8% yy growth, which has been in stark contrast to Consumer Confidence. But this morning's retail sales report actually matches up well with ICSC.  The gov't numbers and the ICSC trends (both 2 and 3-year run rate) are clearly decelerating. 


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart1


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart7





Tory Burch Interview

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart6




Takeaway: This was a big interview for Tory. She grabbed the headlines again only a month after luring ex-RL COO Roger Farrah to be her co-CEO. She came across as being extremely poised, confident, and surprisingly humble (we think she's less humble off camera). She nixed the idea of an IPO, but not convincingly. We still think that will come within 12-18 months. The interview is worth a watch.


NKE, WMT, HMB - Converse Accuses Wal-Mart, H&M of Selling Knockoff Chucks



"Nike Inc.’s Converse sued Wal-Mart Stores Inc. and Hennes & Mauritz AB, along with other retailers and shoe importers, accusing them of selling knockoffs of its iconic Chuck Taylor All-Star sneakers."

"Wal-Mart, the world’s largest retailer, and H&M, Europe’s second-biggest clothing chain, sell shoes that are 'confusingly similar imitations' of the trademarked All-Star shoes that date back to 1917, Converse said in separate complaints filed today in federal court in Brooklyn, New York."


Takeaway: The irony is that Nike had its beta test with Wal-Mart and what was then its Starter brand. That failed miserably and Nike proved one of the few companies to walk away from a partnership with WMT. WMT thought it could go solo in sourcing Converse knock-offs for its stores. That's backfiring. The interesting thing about this space is that so many companies knock off other brands -- it's simply accepted as the norm. But that does not mean its ethical, or better yet, legal.


ZQK- Quiksilver Announces Changes to Leadership Team



"Quiksilver, Inc. announced that the company is taking the next step in its transfer of leadership, which began with the appointment of Andy Mooney as chief executive officer in January 2013. Following a successful handover, Bob McKnight will retire as a senior executive of the company on October 31, 2014, and he will remain a director. The company also said Andy Mooney has been elected chairman and Pierre Agnes has been promoted to president of Quiksilver, Inc., effective November 1, 2014."


Takeaway: The stock traded up 14.5%, and then after the close it is announced that McKnight is retiring for real. Looks like someone got that memo before the rest of us.


LULU, NKE - Lulu Mannequin Wearing the Swoosh


Takeaway: LULU mannequin's never EVER wear Nike's. But these outfits in the front store of Lululemon SoHo broke that rule big time. The other two broke it again by not only wearing Converse, but knockoff Converse. See lawsuit comment above.

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart3


Restoration Hardware Comp? Arhaus

It's so hard to find a comp for Restoration Hardware. People look at West Elm, or Williams-Sonoma, but they're really different customers looking for a different aesthetic at a different price point. But take a look at Arhaus (pronounced Our-House). It is by far and away the closest we've ever come to seeing the 'Resto look' in a place that's not Resto.  Granted, the prices are higher, the quality is lower, and the design is a 7 to RH's 10. It also lacks the size and scale to compete with RH's prices. But this is one to watch. 


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart4


Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart5



Nike Product Spotlight - New Fuel Band

Retail Callouts (10/15): Tory, NKE, LULU, WMT, RH, KATE, ZQK - 10 15 chart2


Takeaway: This is puzzling. Nike shuttered its hardware business in April. It did so, we think, because it had otherwise planned to produce a SportsWatch at a $400 price point. Tim Cook, who is on Nike's Board, likely stepped in and 'advised' Nike that it would be a bad idea to compete with Apple iWatch, which is at a sub-$400 price point. He's right. These fuelbands advertised above could be modified leftover inventory -- at least that's how it sounds to us.





"Kate Spade & Company confirmed its previously announced plan and appointed Thomas Linko as Chief Financial Officer of the Company.  In this position, Mr. Linko will oversee the global finance team and report to George Carrara, President & Chief Operating Officer. Mr. Linko is the former Chief Financial Officer and Chief Operating Officer of Juicy Couture."


Takeaway: This is absolutely not new. It's a positive, as KATE needs strength at the top of its finance organization. But it's not new. As a sidenote, KATE currently has a job posting for a new VP Financial Planning and Investor Relations.





GPS - Gap Inc. Adds 63,000 Jobs This Holiday Season



"Gap Inc. announced plans to hire more than 63,000 seasonal associates nationwide at its Gap, Banana Republic, Old Navy and Athleta stores, call centers and distribution centers for the 2014 holiday season."

"Gap, Banana Republic, Old Navy and Athleta are also coming together to hold a series of in-store hiring events in the company’s first-ever Holiday Hiring Blitz, taking place October 13 - 18."


AMZN - Smiths News launches new Pass My Parcel delivery service with



Pass My Parcel will provide a speedy, efficient and flexible parcel service for consumers who want a quick and convenient way of collecting their parcel. This new service will see Smiths News distribute parcels on behalf of Amazon, to its consumers through a network of independent retailers operating as parcel shops.


WTSL - The Wet Seal, Inc. Announces Initial Steps in Cost Savings Plan



The Wet Seal, Inc., a leading specialty retailer to young women, today announced that it has begun the initial steps to reduce the Company's overall cost structure. As part of this initiative, the Company instituted a workforce reduction resulting in the elimination of a combination of 78 filled and open positions. These include 66 positions at the Company's corporate office, representing a 24% reduction in headcount, and 12 positions at the field management level, representing a 20% decrease.


Gucci Making Retail Push in Russia



"A floundering economy, falling oil prices and a weak ruble against the stronger dollar and euro currencies — combined with a potential worsening of Western sanctions — are no roadblocks for Gucci, as it rolls out its new retail strategy in Russia."

"The Italian firm, which last April took direct control of the retail network and operations for its three stores in the Moscow area, has opened two new units in the region this month — a 10,764-square-foot flagship store located on Moscow’s prestigious Petrovka Street, and a 7,534-square-foot boutique in the city’s GUM department store. Both units feature the latest Gucci store concept, which mixes the brand’s signature rosewood and marble with Art Deco-inspired elements, such as ribbed glass, polished gold, smoked mirrors and bronze glass."


VFC - This North Face Store's Floor Disappears, Forcing Startled Shoppers to Climb the Walls

Pasted from



Alco Stores files Chapter 11, to sell or liquidate



"The 113-year-old retailer and its subsidiary, Alco Holdings Ltd Liability Co., filed voluntary petitions for relief in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division.  It listed assets of $221.7 million and debt of $161.6 million."

"Alco said Wells Fargo intends to provide it with a $110 million revolving credit facility and a $12.6 million secured term loan so it can repay some debts and continue operating."