With estimates coming down and low baccarat hold generally well known, we don’t know if a subpar Q2 will matter. If Steve Wynn is slightly more optimistic about LV, then it’s a safe bet that MGM will be downright bullish.
Steve Wynn’s market commentary has generally proved to be realistic. So when he sounds slightly more optimistic about Las Vegas, we assume that Las Vegas is getting a little better. So what should we expect from the MGM commentary Tuesday morning? Well, after applying the typical MGM multiplier (not to be confused with the Keynsian multiplier although both have been proven wrong), we’d have to say Tuesday’s conference call will be a party!
MGM should report a poor quarter on a lot of metrics. To be fair, their high end properties played very unlucky during the quarter on the Baccarat tables. We estimate MGM’s Baccarat volume share was roughly 50% during the quarter. We know that Strip Baccarat hold the first two months of Q2 was only 8.4% versus 11.9% (fairly normal) in April and May 2009 combined. Since LVS and WYNN already reported Las Vegas results and table holds were below normal but not as low as the Las Vegas numbers indicate. Thus, MGM must have held below even the 8.4% for the Strip Baccarat total.
Given the Baccarat results and a much slower than expected overall ramp we think CityCenter will be once again close to break even on EBITDA basis. Overall, we are projecting total consolidated EBITDA of $271 million on revenues of $1.45 billion and consolidated property level EBITDA of $310m. On an economic basis with JV EBITDA factored in, our projection rises to $332m.
We still think forward estimates need to come down and we are below the Street for 2010 and 2011. However, Q2 expectations are low and management is likely to be extra bullish on the call. So while we think this v-shaped recovery implicit in MGM’s recovery will remain elusive, Q2 may not be the negative catalyst despite the likely poor results.
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I’ve had my fill of the Fiat Republic’s representatives defending another sequential slowdown in US GDP growth for today. The math doesn’t lie; politicians do. In the aftermath of the most government “stimulus” spending in the last 13,000 years of mankind, US GDP growth has been more than CUT IN HALF in less than 6 months down to +2.4%.
The worst part about this morning’s Q2 GDP report is how much more realistic it makes our Q3 estimate of +1.7%. Consensus is still double our estimate. Once earning’s season is over and the he said/she said about European stress tests subsides, the market will once again be focused on what we call Macro Time.
There are very few leading indicators that are not flashing bearish for US economic growth on an intermediate term TREND basis. Three of the most important ones (US Treasuries, US Stocks, and US Currency) look flat out frightening on a 3 month basis:
- US Treasury short term yields are hitting record lows today (with 2-year yields 0.55%)
- US stocks remain well below our Bear Market Macro intermediate term TREND line of 1144 (TRADE line support = 1076)
- US Currency is down for the 8th consecutive week and looks as depressing as Paul Krugman.
Don’t worry though – President Obama is speaking at a Chrysler plant this morning saying “I’m just doing the right thing.”
So much for Transparency, Accountability, and Trust.
Keith R. McCullough
Chief Executive Officer
Position: Bullish Bias on Germany (EWG)
Looking at the data out of Europe over the last two days one could be led to conclude that the fundamentals look great: European economic confidence rose to the highest level in over two years (see chart below), Germany’s unemployment rate declined for the 13th straight month, German and Swedish retail sales were up 2.8% Y/Y and 3.1%, respectively, and even Spain’s total housing Permits improved on a month-over-month and year-over-year basis! Further, there have been some impressive Q2 earnings beats from European bellwethers.
We’re however cautious on the European outlook in the back half of 2010 for a number of factors, including: growth prospects due to austerity policies; Housing Headwinds (in particular in the US, UK, and Spain); the winding down of the earnings season; the risk of sovereign debt leverage on European banks that the European stress tests largely ignored; and slower growth in the US—our forecast is for annual growth of +1.7% in 2010 and 2011, well lower than consensus of 3-4% range for 2010.
Interestingly European equity markets largely sold off on the positive European confidence numbers yesterday. Today, we’re seeing follow-through selling on the back of the slowing Q2 US GDP print. With markets highly sensitive to US and Chinese data, we believe that the US government’s failure to address its rising deficit and debt levels could drag markets down in 2H10. Certainly the lack of confidence in US policy and economic health is showing up in the data: 2 year US treasury yields are hitting rock bottom!
Currently, we’re not invested in Europe in our virtual portfolio as we're waiting and watching for confirmation from the DAX and FTSE. The FTSE broke its intermediate term TREND level of 5298 today, while the DAX is holding its level of 6072; we’ll be waiting for confirmation of the moves before we act. We sold our long position in the Pound via the etf FXB on 7/28 at its immediate term over-bought level of $1.55 and would buy it back at $1.52. As a note, our immediate term over-bought level on the EUR-USD is $1.30, and we’d buy it back off these oversold levels at $1.27 (intermediate term TREND support).
R3: REQUIRED RETAIL READING
July 30, 2010
TODAY’S CALL OUT
There was some noise in the market yesterday suggesting that basketball footwear trends are getting worse and this is impacting trends at Foot Locker. The NPD data below shows quite the opposite trend. One additional point on the basketball category, which in general has been a laggard relative to performance running. The real opportunity for the category is building and will be a Fall event. The small, but relevant, launch of UA’s shoe along with whatever Nike is working on to juice sales of the “Big Three” in Miami is more excitement in the category than we’ve seen in years. Seasonally, hoops is also more 2H than 1H weighted.
LEVINE’S LOW DOWN
- Due to recent increases in cotton prices, Carter’s now expects finished good costs to rise by 10% for the company’s spring ’11 deliveries. Selective price increases will be taken to offset the inflationary pressures. On the footwear side of things, Steve Madden suggested that they are expecting a 5% increase in costs.
- Despite tough comparisons with last year’s record boot season, Steve Madden remains bullish on prospects for growth in the category this year. The company noted that early reads drawn from Nordstrom’s Anniversary Sale, Macy’s pre-sale, and their own “Sneak Peak” all indicate boots should have another solid season. Perhaps what is most interesting here is that the bullish trends are coming at a time when the weather has been least conducive to facilitating sales of the product category.
- Keep an eye on Hermes China luxury sub-brand, Shang Xia, which launches in September. The brand is 100% locally designed, sourced, and managed locally in China. While specifics are still scant regarding the line, speculation suggests it will launch with housewares, accessories, and furniture. While the first store is rumored to be in Shanghai, there may be plans to eventually open a store in Paris, presumably to add authenticity to the “luxury” status of the start-up brand.
When a Box Isn’t Just a Box - All eyes will be on the West Coast next week, where Bloomingdale’s and Nike unveil prototypes in Santa Monica Place in California. In the case of Bloomingdale’s, it’s a beachy version of the department store’s contemporary-driven SoHo unit in Manhattan, which the company hopes to replicate elsewhere. At Nike, “there’s a new mission on retail stores now,” said a source. “They want to take control of the environment where their products are sold.” Jeanne Jackson, former Banana Republic president and former chief executive officer of walmart.com and Gap Inc. Direct, was a Nike Inc. board member but last year shifted into the role of president of direct-to-consumer and has been leading the retail effort. The two-story, 20,000-square-foot Nike store will provide sports teams customized products in 115 styles, market-tailored product offerings, community resources and the introduction of Nike+ Run Club, and is Nike’s first multicategory opening in the U.S. since the last one in 1999 in Denver, according to Nike media relations manager Jacie Prieto. “We have been approached in the past six months by maybe a half-dozen major brands to do new prototype work,” said Tom Bowen, a principal of Callison, the architecture and design firm. There is a surge among strong retailers looking at ways to position themselves ahead of the competition through new prototypes. We also see much more focus on making prototypes internationally adaptable. <www.wwd.com>
Hedgeye Retail’s Take: With limited square footage growth in the future for many retailers, the importance of innovative and differentiated concepts is reaching new heights. Fortunately for the consumer, it appears we have turned the corner to some degree on investment in innovation, something that was surely missed over the past 2 years.
Sears Lures Youth With Music - Now + Here, a new department that launched Thursday at Sears stores nationwide, aims to seduce that most fickle of audiences — juniors and young men. “This is part of our overall apparel transformation,” said Melanie Henson, chief marketing officer of Sears Holdings Corp. The retailer has begun to upgrade its apparel business under John Goodman, executive vice president of apparel and home, who joined Sears about nine months ago. The new Now + Here areas, located at the mall entrances of Sears units, marries two of the demographic’s main pursuits — fashion and music. Sears partnered with Live Nation, the largest producer of live concerts in the world, to give Now + Here an authentic music component. The retailer is tapping into fall’s hot trends with brands such as Battle Gear, Girly Grunge, Biker Chic and Sweet Dreams. <www.wwd.com>
Hedgeye Retail’s Take: Sounds like a mini Hot Topic shop-in-shop on the way into the store and we all know what the iPod has done to the music industry. Clearly this effort is aimed at getting a younger male to cross the Sears lease line, but we’re not convinced.
Wage Hikes in Bangladesh Move Closer to Reality - Following months of violent protests in Bangladesh’s garment industry, Labor Minister Khandaker Mosharraf Hossain said Thursday that the government would nearly double the wage rate for the country’s three million garment workers in November. The move came under intense pressure from workers, workers’ rights groups and the U.S. and European Union at a time when retailers and brands are increasing apparel production there to offset rising costs in China. The garment industry, which exported $12.5 billion for the 12 months through June, accounts for nearly 80 percent of Bangladesh’s annual exports. <www.wwd.com>
Hedgeye Retail’s Take: As expected, another reason for apparel inflation.
Location-based Mobile Advertising is Here - Google is stepping into location-based advertising with the introduction of mobile banner add that show users nearby services. The unit is an offshoot of AdWords' location extensions. It allows advertisers to attach their phone numbers and business location on an expandable map. The new ad format will run on sites and applications that are part of the Google Display Network. Users of smartphones like iPhone and Android will see a text call to action and small thumbnail graphic. Tapping on the ad expands it to show a Google Map with the business plotted and number displayed. Google will only charge advertisers when users tap to call the business or visit the advertiser's mobile site. <www.brandweek.com>
Hedgeye Retail’s Take: At some point there has got to be some consumer backlash from all this technology tracking a consumer’s every move. In the meantime, this adds yet another layer of efficiency to the marketing process for both the advertiser and the ad server.
Opposition to the Delahunt Bill - As some members of Congress gathered today to promote the recently introduced Delahunt bill to mandate sales tax collection by Internet retailers, others pushed a new House resolution by Rep. Paul Hodes (D, NH) that opposes it. The Hodes resolution, which has bipartisan support from four representatives, runs counter to House Rule 5660, The Main Street Fairness Act, which was introduced on July 1 by Rep. William Delahunt (D, MA) and calls for Congress to support the Streamlined Sales and Use Tax Agreement and authorize states that abide by that agreement to force Internet and catalog retailers to collect and remit sales from customers in those states. In effect, the Delahunt bill seeks to overturn the status quo that says retailers don’t have to collect sales tax in states where they don’t have a physical presence, such as stores, offices or distribution centers. <www.internetretailer.com>
Hedgeye Retail’s Take: No one said this was going to be an easy battle, but with States looking to fill their budget gaps, it’s an easier argument than it has ever been over the past 20 years.
AEO Online Snafu - American Eagle Outfitters three youth-focused apparel brands—American Eagle Outfitters, Aerie and 77kids—were unable to sell online for three days last week. The retailer’s brands, all of which are featured online through the main web site AE.com, were down from approximately 5 p.m. Eastern time on Monday, July 19, until approximately 6 p.m. on Thursday, July 22, according to Gomez, which monitors the performance of web sites as a division of Compuware Corp. American Eagle, No. 51 in the Internet Retailer Top 500 Guide, posted a notice to site visitors during the downtime: “We’re making updates to our sites. Free shipping on us when we’re back, through Monday, July 26.”
Hedgeye Retail’s Take: Sounds like something went terribly wrong for the site to be down that long. While we are pro ecommerce, this incident clearly highlights the risk of running in theory a “single” store platform. Or, maybe we’re reading into this too much and AEO was just stealing a play from the Apple playbook in taking down the site to generate buzz.
Rawlings Goes Football - The National Football League has signed Jarden's brand Rawlings to a multi-year deal as exclusive licensee for select tailgating products. The Rawlings line will include tent canopies, grills and chairs. The deal also includes an extension deal, beginning in 2011, to be managed by Jarden Sports Licensing. The agreement expands the partnership with the NFL across a number of Jarden's brands, including Coleman, Bicycle and Shakespeare. Non-exclusive tailgate products will include coolers, stadium seats and footballs—all to be merchandised under the TLG8 brand umbrella and its "Real Brands for Real Fans" tagline. The entire collection will launch in April 2011. <www.licensemag.com>
Hedgeye Retail’s Take: We can’t think of a better portfolio of brands than Jarden’s for this partnership. Unfortunately the fan will have to wait an entire NFL season before the entire collection launches for the 2011 season.
Daily Trading Ranges
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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.