Now that we have the June Macau detail, we think Wynn Macau will beat the Street but Wynn Las Vegas will fall short.  Good thing this is essentially a Macau company.



We estimate WYNN will report Q2 revenue of $1.03BN and EBITDA of $261MM, exceeding rising consensus revenue and EBITDA numbers by 7% and 11% respectively.  Not surprisingly, we expect the beat to come from Macau and for Vegas to produce another uninspiring quarter. 




We estimate that Wynn will report $313MM of net revenue and $62MM of EBITDA this quarter in Vegas. 

  • Net casino revenue of $132MM, non-gaming revenue of $235MM, and $45MM of promotional expenses.
  • RevPAR down 5% YoY.
  • Table drop flat with last year due to expected Baccarat share losses to MGM.  Unlike last quarter, Wynn has a more difficult hold comp.  In 1Q2010 Wynn’s tables held at 23.2% compared to 17.7% in 1Q2009.  Coupled with a 7% increase in table drop, Vegas table win produced a YoY increase of 40%.  Unfortunately, 2Q09 hold in Vegas was normal at 20.7% and therefore, we expect to see only flat to slightly down table win.
  • We project slot handle to be down around 10% YoY compared to a 27% YoY decline last quarter.  Encore opened Dec 22, 2008, so the first half of '09, especially 1Q2009, got a lot of traffic “checking out” the new product, making 1H09 a tough comp for Wynn compared to that of other strip properties.



We estimate that Wynn’s Macau property will report $719MM of net revenue and $211MM of EBITDA. Good luck this quarter aided an already strong performance.

  • VIP win of $709MM.
    • We estimate $22.5BN of RC volume.
    • We estimate 14% of RC will come from direct play--up from 10% last quarter--due to Encore.
    • Hold of 3.15%.
  • Mass table win of $128MM (up 24%) and slot win of $49MM (+15%)
  • We assume rebates of $213MM (30% of win rate or 95bps) and all-in commissions of 41% vs. 39% in 1Q2010.


2Q brought about a sharp upswing in comparable store sales. 


On 6/25, I wrote a post titled “COSI – SALES MOMENTUM IN 2Q” detailing my view that 2Q10 would bring a sequential improvement in same-store sales, driven by product initiatives and marketing efforts.   Company-owned comparable store sales for 2Q came in at 3.3%, versus -12.7% in 2Q09 and -4.3% in 1Q10.  On a two-year basis, this implies a 310 bp sequential improvement in top line trends.  Our comparable store sales estimate from 6/25 of +5% implied a two-year trend sequential improvement of 395 bps – a difference of 85 bps. 


This result is encouraging but what gives me additional conviction on the story is that comps in June came in at +5.5%, indicating that trends were improving throughout the quarter.  In the press release, President and Chief Executive Officer of Cosi, James Hyatt, said that the strong performance was largely due to the company’s “expanded marketing efforts” aimed at broadening consumer reach and driving traffic in multiple dayparts.   Traffic trends at Cosi improved from -5.6% in 1Q to +3.1%.  On a two-year basis, trends improved by 410 bps sequentially.




Howard Penney

Managing Director

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Bear Market Macro: SP500 Levels, Refreshed...

Bullish hope in any bear market is fleeting. After an early morning run-up, another 2-day bounce in the SP500 is fading. The question now is can the US stock market make another lower-low (YTD closing low for the SP500 was established last Friday at 1022)?


In our risk management speak, we’d call the probability of seeing a fresh YTD low probable. In the chart below we show our refreshed immediate term TRADE line of support down at 1006. That means it’s probable that the SP500 could lose 55-60 points in a day. That would leave a mark.


Since every single line in every single major market outlined in our Q3 Macro Theme presentation (slide 25) remains broken AND we see a probability of an immediate term drop of this magnitude, we are going to stick with the ZERO percent asset allocation to US Equities that we moved back to yesterday.


If you are looking for a catalyst for weekend news-flow, tomorrow kicks off the National Governors Association (NGA) meetings in Boston (2010 Annual Meeting, July 9-12). Our Q3 Macro Theme of American Austerity will be a front and center topic of discussion given that Governors know this national deficit and debt situation as well as anyone trying to balance a budget. The numbers don’t lie like some politicians do.


Keith R. McCullough
Chief Executive Officer


Bear Market Macro: SP500 Levels, Refreshed...  - S P

Half Empty or Half Full?

Another mixed-bag month for same store sales, but this time it appears to be more directionless than most.  The focus is about to shift to back-to-school and the challenge is in reading whether June was half-empty or half-full.  Depends on who you ask.



Another mixed-bag month for same store sales, but this time it appears to be more directionless than most.  The reality is, demand is neither getting materially better or worse.  The underlying two-year comp trend has now been flat to down 1% since December (with the exception of a near perfect setup in March).  Perhaps the biggest takeaway with today’s results is that the outlook is less clear than it has been in a while.  This is best evidenced by the limited amount of earnings revisions we received today, despite the fact that many companies actually posted solid absolute results, cited tight inventories, and strong sell through of higher margin apparel.  Yes, there is earnings upside to be had but that is a coincident indicator.  The focus is about to shift to back-to-school and the challenge is in reading whether June was half-empty or half-full.  Depends on who you ask.


Half Empty or Half Full? - SSS 7 8 10


Highlights from another sales day data dump:

  • Target noted that strength in the month was led by food and HBA, followed by apparel.  Most notable was management’s callout of softness in electronics, video games, music, and movies.  Recall that TV’s especially have been under pressure given an industry slowdown in promotional activity.
  • Ross Stores continues to highlight home, dresses, and shoes as top categories.  This is consistent with prior months.  Florida and the mid-Atlantic were the strongest regions, increasing by high single digits.
  • Kohl’s noted that favorable weather (a.k.a HOT!!!) helped to lead the Northeast and mid-Atlantic to outperformance for the month.  Footwear and men’s were the strongest categories for the month.  Strength in men’s is notable and something to watch.  Clearly Father’s Day had a positive impact.
  • Nordstrom highlighted dresses, jewelry, and women’s shoes as leading categories for June.  Also of note was particular strength in the company’s Half Yearly Sale, which posted a high single digit increase. Sales trends in the first half of the month were stronger than the back half, which is in part due to the timing of the sale event.
  • JC Penney noted that company’s best region was the Southeast, while all were positive.  Interestingly, JCP cited a mid teens increase in regular and promotional sale across all apparel categories, offset by substantially lower clearance sales.  Overall, this is a solid endorsement for gross margins, although an earnings guidance update was notably absent from the release.  Home continues to be a weak spot for the company.
  • Abercrombie noted that its positive June results were largely the result of sales events that ran across all brands throughout the month.  Notably, weeks four and five were the strongest.  No mention of bed bugs.
  • Gymboree attributed its upside revision to earnings to share repurchase activity.  The company repurchased 2.2 million shares in the quarter for $96 million.  This leaves the company with 28 million shares outstanding, which suggests a pretty meaningful buyback has taken place.
  • Gap Inc. noted that “June results were disappointing, driven by traffic that remained negative at all three brands”.  Furthermore, margin pressure is now anticipated to in July to keep inventories clean.  At Gap, kids and baby outperformed adult, while men’s outperformed women’s.  Overall, the company’s tone and results clearly highlight concern in the near term.  Recall that management essentially stated that 2010 is a topline year and inventory/margin improvements are nearing an end.
  • Costco noted that inflationary trends were slight and consistent with May.  Management also noted that TV and computer sales remain negative, in line with the trend over the past several months.  Less coupons and promotional activity is a key reason behind the weakness in the TV category.
  • E-commerce had another standout month at Kohl’s (~+50%), Abercrombie (+62%), Aeropostale (+43%) , Macy’s (+37.6%), and Nordstrom (+66%).
  • Aeropostale noted that all regions for the month were positive and equally strong.  Weeks one and four were the strongest.
  • American Eagle stands out as one of the few to admit sales were below expectations for the month, with weakness persisting throughout June.  As a result, promotional activity was increased to drive incremental unit sales.  The formula worked, driving unit sales up mid-teens while average unit retails decreased by low double digits.  Unfortunately, this strategy will result in margin pressure making this the second time in as many months that AEO tempered earnings expectations.
  • Hot Topic highlighted a wide divergence in category performance within its stores for June.  Licensed led the way, increasing by 18% while fashion apparel was considerably weak, down 29%.
  • Limited Brands continues to note (as they have for the past several months) that merchandise margins continue to improve driven by less “sale” days, tighter inventory management, cost savings efforts, and favorable product mix shifts.  Overall, newness continues to sell well as evidenced by a 17% comp increase at Victoria’s Secret. 
  • HomeGoods continues to outperform the other divisions at TJX, with comps increasing 8% on top of a strong 10% increase last year.  On the flipside management noted that the company’s UK and Ireland stores are underperforming in part due to execution issues which are being exacerbated by weakening consumer confidence in those regions.

- Eric Levine


YUM is scheduled to report 2Q10 earnings after the close on Tuesday.  On an EPS basis, my estimate is coming in light, at $0.50 versus the street’s $0.54 estimate, but given the company’s track record of beating expectations, I would not be surprised if numbers came in above my estimate. 


Going into the quarter I continue to have two primary concerns, largely related to what I recognize as overly aggressive unit growth in China and profitability issues in the U.S. 





Despite the expected sequential slowdown in same-store sales growth in 2Q10 on a 2-year average basis (management’s guidance implies a 300 bp deceleration), I don’t think the issues in China will become more apparent until the second half of 2010 when restaurant profit margin should decline YOY.  Specifically, management pointed to commodity inflation and increased wage inflation in the back half of the year.  It is important to remember that restaurant margin growth in 1Q10 was driven primarily by commodity cost deflation of $15 million.


Although same-store sales improved significantly in 1Q10 on a 2-year average basis, I don’t think this trend is sustainable (again, management’s 2Q and FY10 guidance implies a deceleration).  Any slowdown in same-store sales growth will take a toll on margins as the company faces commodity and wage rate headwinds in 2H10.


As shown in the chart below, YUM China has been operating in what we call “Nirvana”, when both same-store sales and YOY restaurant profit margin growth are positive.  YUM should remain in Nirvana territory in 2Q10, but trends should get more difficult in 2H10, with the company potentially falling into “Deep Hole” territory (negative same-store sales and YOY decline in restaurant level margin) in 3Q10 and “Trouble Brewing” territory in 4Q10 (positive same-store sales and YOY decline in restaurant level margin). 


For reference, when we think about the four quadrants outlined below, we recognize the trends associated with operating in both the “Life-Line” and “Trouble Brewing” territories as unsustainable.  Broadly speaking, if a company is posting positive same-store sales and declining margins (Trouble brewing), the company is unable to leverage its positive top-line and is therefore spending too much (often a result of growth related costs). 


Within “Life-Line”, a company’s margins continue to grow despite negative same-store sales growth.  A lot of restaurant companies have operated in this quadrant in recent quarters as they have focused on cutting costs to offset the difficult sales environment.  A company cannot cut costs forever without hurting the customer experience so margins will eventually follow the direction of same-store sales growth. 






YUM is facing its most difficult same-store sales comparison in 2Q10 as it laps the Kentucky Grilled Chicken launch and a +3% comp at KFC (the only positive comp at KFC in 2009).  That being said, I am expecting same-store sales in the U.S. to improve slightly in 2Q10 from 1Q10 on a 2-year basis, primarily as a result of the new $2 combo meal at Taco Bell (lower drink and combo sales hurt 1Q10 trends) and the Double Down at KFC (which was reported to be on the menu indefinitely after initial plans introduced it as an LTO). 


During the first quarter, U.S. profitability was hurt by an increase in the number of consumers buying off the “Why Pay More” menu at Taco Bell.  Even if same-store sales get better in 2Q, this value menu will likely continue to be an important driver of traffic growth at the concept.  This combined with the fact that commodity costs should turn inflationary in the U.S. and the YOY restaurant profit margin compares get increasingly difficult for the next two quarters should continue to put pressure on U.S. profitability. 


The chart below highlights that U.S. same-store sales and margins have suffered for some time now, with the company operating in a “Deep Hole” for the last two reported quarters.  YUM will likely remain in a “Deep Hole” in 2Q10 but should then recover somewhat in the back half of the year as it emerges from the “Deep Hole” and potentially moves into “Nirvana” territory in 4Q10.  This expected recovery is largely a function of easy comparisons in 2H10 (as management pointed out on its 1Q10 earnings call).  YUM is lapping -6% and -8% same-store sales from 3Q09 and 4Q09, respectively. 


We will have to see how same-store sales track for the rest of the year in the U.S. (QSR trends, on average, continue to be choppy), but I continue to think that YUM’s full year U.S. operating profit could fall short of the company’s guidance of 5% growth (I am currently modeling nearly 3% growth with the bulk of that growth coming in 4Q10 when the company is lapping a 23% decline from 4Q09).





Howard Penney

Managing Director

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