As we expected, Great Canadian missed the Street's revenue estimate but beat on margins. Most of the call was focused on growing the business in the current state of the economy and use of free cash flow


"Great Canadian's results for the first quarter of 2010 present a mixed outlook for the year ahead. Many of our properties continue to witness the impact of a challenging economy.  While visitation levels have remained relatively robust, our patrons across Canada have become more conservative in their entertainment spending.  Throughout 2010, we will continue to improve every customer-facing facet of our business.  This is the most cost effective route to both recovering those revenues lost during 2009 and generating new growth."

- Ross J. McLeod, Great Canadian's Chairman and Chief Executive Officer



  • "The year-over-year revenue decline was due to the impact of the challenging economy, the mandatory February closure of Hastings Racecourse during the Winter Olympics, and the effect of the weakened U.S. dollar on the Great American Casinos’ revenues.  These declines were offset by a revenue increase of $1.8 at the River Rock Casino Resort."  
  • "Boulevard is currently facing challenges from both a competitor's facility and disruption related to provincial highway enhancements, in addition to the pressure the economy has placed upon its patrons.  We have already begun to address these challenges, and Boulevard will remain an area of focus over the coming quarters."
  • "The Canada Line and River Rock's recent redevelopments have created significant growth in both visitation and gaming volumes at that property.  Increased efficiency allowed this growth to translate into an impressive improvement in River Rock's EBITDA."


  • The provincial highway construction project causing access issues at Boulevard will be completed in 2013 and will likely continue to cause disruption at the property. Working on property enhancements at Boulevard to offset some of this disruption.
  • Moncton Casino opened in New Brunswick in May and may impact Nova Scotia (this property is over 200km away).


  • EBITDA margin guidance in light of the property enhancements that they are planning to implement at Boulevard and across other properties?
    • Will try to deliver similar types of performance. Mgmt basically avoided the question
  • Share buyback?
    • Thinking about it, but there is nothing that they can disclose. Doesn't sound like a decision has been made
  • Competition at Boulevard?
    • Cascades is being more aggressive
    • Quite a bit of construction that is impacting the traffic flow
  • Liquor license at Naniamo
    • They received the license last week and hope it helps on the margin - but won't be a game changer
  • Flamboro downs?
    • What is the risk that they don't renew the license.  OLG has been looking for a new CEO.  There are about 8 licenses that are in a wait and see mode as a result of the vacancy in the office.  It would be expensive for the province not to renew the license given that they receive the bulk of the revenues from the operation.  The OLG has rolled over every racetrack license that has come up for renewal thus far.
  • 1Q2010 is probably indicative for what they seeing going forward for F&B  revenues at Georgian Downs.
  • Hotel revenues at River Rock - is up y-o-y but not benefiting from the Olympic business as it did in the 1Q.
  • Gateway margin comparison - how much room is left?
    • Results at Gateway were achievable before they introduced amenities to their properties.
    • Basically when they had slots in a box, those 50+ margins were achievable not at a "full service" property
  • Capex: $10MM development and $7MM of maintenance for balance of 2010
  • Timeline on cash buildup before returning it to shareholders?
    • Don't want to leave themselves without options or flexibility.  So they will be patient on deploying that cash. Unclear when that happens.  But they are very focused on creating shareholder value.
  • They just paid down the line.  So it's not like they have a lot of cash laying around today - what they have is being used for working capital.  It will accumulate from here.  They are comfortable with their current leverage ratio. They aren't focused on any M&A opportunities.
    • They did hint at being keenly interested in the master redevelopment in Ontario if the law changes to allow table games
  • Boulevard - recently did a refresh of the casino
  • the BC gaming market has changed from a build it and they will come because of under penetration. BC is now a mature market that is fairly saturated and they need to start thinking outside of the box to generate incremental dollars and traffic. Just hired a new marketing person to cultivate new business.
  • Why didn't interest expense decrease when they paid down their debt this Q?
    • Lower interest income in the current Q vs. prior quarter.  The other issue is that they are no longer capitalizing interest.  Thinks that current net interest expense is a good run rate.
  • Higher stock comp?
    • Result of higher stock price (y-o-y) but lower number of options granted so it's valued higher under Black Scholes formula.
  • River Rock is benefiting from the Line opening but also improvements at the property. The Line continues to get more traction in the market place. 
  • Will they be investing more marketing dollars in Nova Scotia to offset any potential impact from Moncton?
    • They are already did a refresh and have some programs in place but think that there will still be an impact initially.
  • How much cage cash does the business require: $4.6MM at the end 1Q2010 + $15MM provided by the BCLC.

SP500 Risk Management Levels, Refreshed

The SP500 bounced where it should have. Now it’s doing its best to close above the intermediate term TREND line (1143).


I see the potential for 2 high-probability scenarios playing out from here: 

  1. If the market can hold today’s intraday gains, there is no significant resistance until the dotted red line in the chart below (1168). From 1168-1188 there is significant resistance and each line in that range would establish a series of lower-highs. On the margin, lower highs are bearish. 
  1. If the SP500 fails to hold and close above the intermediate term line (1143) throughout this week, there is no reason to believe that the SP500 won’t test its prior closing YTD low of 1110. As of 1PM EST I am currently registering 1107 as downside support. On the margin, lower-lows are also bearish. 

Under each of these scenarios, The Risk Manager says you should be making sales today on strength. We’ve sold 3 long positions out of our Virtual Portfolio (CIT, BBBY, and PRSP) and sold our trading long position in SPY to take our Asset Allocation to US Equities down from 6% to 3%. We have not started to re-short stocks or ETFs yet.



Keith R. McCullough
Chief Executive Officer


SP500 Risk Management Levels, Refreshed - S P

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JNY: More Fuel To The Fire

Here’s more context suggesting that 1) the Stuart Weitzman deal was entirely driven by Irving Place, and 2) the company is likely near peak margins.


Based on the feedback thus far, we struck a chord somewhere along the line with our JNY note this weekend. Footwear News has also since published what I thought was an insightful interview with Stuart Weitzman. Here are some excerpts that add fuel to the fire. Check out the full article at for additional context.


FN: Why was now the right time for a deal?
SW: It wasn’t necessarily the right time or the wrong time for me. It was obviously the right time for Irving Place Capital.

Hedgeye Retail: This was entirely driven by what the private equity partner wanted – or needed.


FN: You’ve been looking to hire a new CEO and other top executives. How will this deal affect the search?
SW: If Jones can lead me somewhere, that’s great. I haven’t yet found the [people] I want, and maybe they have resources that can give me more opportunity to choose. ... With or without an association with Jones, I have to start passing a lot of this [work] along to talented people. [I’m the CEO, chief creative force and chairman], and I shouldn’t be wearing all these hats. We have the same officers running the major parts of the company as we did many years ago, and we’re [nearly] 20 times bigger. We [have been] stretched thin.

Hedgeye Retail: Find me any fashion brand that hit a point where it was ‘stretched thin’ with resources and had too few executives wearing too many hats that was NOT operating at peak margins. Seriously… being ‘stretched thin’ equals running near max utilization. To maximize throughput, you need to invest in more talent. Is JNY up to the task?


FN: Your wife, Jane, is a big part of the company. Will the deal affect her role?
SW: Certainly not. She’s EVP and handles special projects, particularly in public relations events and accessories.

Hedgeye Retail: Remember when LIZ bought Juicy and noted how vital the founders (incl Gela Nash-Taylor – wife of John Taylor, bassist from Duran Duran) were? Where are they now?


PIIGS Package, and other Charts

Position: Long Germany (EWG)


With Europe’s €750 Billion loan package facility headline news (and rightfully so), below are two incremental charts we’re looking at.


1. Piling on Debt, has consequences, including inflation.  While Europe’s loan package mutes the immediate term threats of contagion across Europe, it does not excuse Greece (or the other PIIGS) from issuing the necessary austerity measures to cut its deficits.


PIIGS Package, and other Charts - g1


2. German exports received a boost in March, rising 10.7% versus the previous month. As part of our Q2 Theme Sovereign Debt Dichotomy, we’re bullish on Germany, especially as a weaker Euro benefits exports.


PIIGS Package, and other Charts - g2


Matthew Hedrick


The Macau VIP segment for LVS has not been keeping up with the market. Some of this is deliberate, most of it is not.



Macau market Rolling Chip (RC) volume increased a whopping 76% y-o-y in April.  LVS, on the other hand, could only muster a 10% increase in RC.  The Venetian actually experienced a 23% decline in RC but pulled a rabbit out of its hat in the form of high hold % (and maybe higher direct play) to increase VIP revenue 22%.  Even in Q1, LVS failed to keep up.  Market-wide RC grew 75% in Q1 while LVS and Venetian only expanded 29% and 11%, respectively.


The chart below shows the pretty consistent erosion in LVS RC market share since December of 2008.




So what’s going on?  Here are some thoughts:

  • SJM market share push – We first highlighted this on 02/08/2010 in our note, “MACAU: A MARKET SHARE BATTLEFIELD?.”  SJM embarked on an aggressive market share push with many of its properties and rooms on 5% franchise structure which is very attractive to the junkets.  Moreover, the company has targeted the LVS junkets.  SJM has been on a steady market share climb since September 2008, increasing its RC market share 1,400bps to a 2 ½ year high of almost 35% in April.
  • City of Dreams commission hike – Despite a 1.25% commission cap agreement with The Venetian, we are hearing that CoD is actually paying many of its junkets a higher rate.
  • Triads – I thought these guys went away peacefully when Macau opened up the casino industry.  Yeah right.  The media attention lately on LVS alleged ties with a Triad backed junket does not go over well with regulators.  If LVS is pretty smart, and I think they are, they will be very careful to pull away from any even remotely shady junket.  I don’t think those junkets necessarily want the attention either and they may distance themselves from the American operators.  Look for Wynn and LVS to continue to experience VIP share degradation. 
  • CoD addition to the market – This is partly to blame for LVS’ RC share loss but only a small part.  CoD garners only about 8% of the market and a lot of that comes from MPEL’s own Altira property.
  • Shift to Four Seasons – Four Seasons is on a ramp but since inception, that property has only generated about 17% of the VIP turnover as Venetian.
  • More direct play – Here is the positive take away from the bunch.  The Venetian has absolutely been trying to cultivate this business.  With player rebates in the 0.77%-1.05% range (or 28-34% of the table hold rate) versus junket commissions of 1.25%, direct play is much higher margin.  The chart below shows direct play as a percentage of RC for Venetian and Sands.  Clearly, Venetian is on the upswing and that is deliberate.  Higher direct play will usually eat into VIP but the net will be a positive because of the higher margin.



LVS has clearly stated that it intends to be primarily a non-junket Macau operator.  Over the long-term that should be a positive and we are quite constructive on the long-term competitive positioning of LVS.  However, LVS currently remains very reliant on VIP.  In 2009, we estimate 48% and 39% of Venetian Macau’s net table revenues and table profits, respectively, were generated from VIP.  When market VIP growth slows – we think post May – near-term investor growth expectations may have to be ratcheted down for LVS.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.