This past week's numbers look unreliable.
The numbers are in and last week generated HK$6.2 billion in table revenues for the Macau casinos, as reported. HK$6.2 billion is one of the “placeholder” numbers we’ve written about extensively and cannot be relied upon (see our note, "WE'VE BEEN PLACEHOLDERED!" on 4/29/2014). In fact, the 3rd week of May last year also generated exactly HK$6.2 billion of table revenue. Moreover, month to date table revenues totaled HK$18.6 billion - divided by the 3 weeks equates to, you guessed it, HK$6.2 billion per week. Come on, can we be at least a little creative?
We expect a positive catch up in next week’s data or the subsequent week that could push YoY growth close to our 20% estimate. In fact, our sources on the ground are indicating they are pleased with both VIP and Mass volumes and hold percentage seems to be tracking close to normal. The UnionPay issue, junket incidents, and China Macro do not appear to be having much of a negative impact on the market.
For market share, Galaxy is the only company tracking meaningfully above its recent trend, at the expense of SJM.
Takeaway: TGT CMO responds to scathing employee letter. Adi CEO talks succession plan. WMT won't oppose minimum wage hike.
HEDGEYE RETAIL IDEAS LIST
EVENTS TO WATCH
- URBN - Earnings Call, 5:00pm
- DKS - Earnings Call, 10:00am
- TJX - Earnings Call, 11:00am
- TIF - Earnings Call, 8:30am
- PETM - Earnings Call, 10:00am
- TGT - Earnings Call, 10:30am
- AEO - Earnings Call, 11:00am
- WSM - Earnings Call, 5:00pm
- BKE - Earnings Call, 10:00am
- BONT - Earnings Call, 10:0am
- ARO - Earnings Call, 4:15pm
- ROST - Earnings Call, 4:15pm
- GPS - Earnings Call, 5:00pm
- FL - Earnings Call, 9:00am
TGT - The Truth Hurts
Target CMO, Jeff Jones, in response to the article posted by an anonymous employee on gawker: (http://gawker.com/target-headquarters-in-desperate-need-of-help-says-e-1573101642)
- "You’d think that these two incidents alone [Data Breach & CEO resignation] would create enough pain to last a brand a lifetime but one of the most challenging things that has happened, in my opinion, have been reports, some attributed to unnamed team members, that paint a picture of a culture that is in crisis. When a recent post on a well-known blog called me out by name, it only felt right that I should respond."
- "While we would have preferred to have a conversation like this with the team member directly, speaking openly and honestly, and challenging norms is exactly what we need to be doing today and every day going forward."
Takeaway: Normally we wouldn't characterize the opinion of one disgruntled employee as indicative of the corporate culture, but the fact that TGT's CMO, Jeff Jones, personally addressed the anonymous letter in public is telling. Jones was actually the only person called out as being a positive influence in the executive ranks. He's speaking up on behalf of the executive officers of Target, most of whom are afraid for their jobs. They should be.
ADDYY - Adidas CEO Herbert Hainer to prepare succession in coming years: Report
- "The long-serving chief executive of Germany's Adidas said preparing the sportswear giant for a change at the top when his contract ends in 2017 will be among his biggest priorities, Sueddeutsche Zeitung reported on Saturday."
- "I will not stay forever...One of my key tasks in the next three years will be to initiate the change at the top and to escort it."
Takeaway: Not a big shock given that Hainer has started to divert his attention towards other interests including the role of President and Business Chairman of the Bayern Munich football club. That, and the fact that he's been unable to consistently grow the core brand in key markets on a sustainable basis without relying on acquisitions.
WMT - Wal-Mart Says It Won't Oppose Increase in Minimum Wage -- Update
- "Wal-Mart Stores Inc. said it wouldn't oppose an increase in the federal minimum wage, its most explicit comment yet on the controversial debate to move past the $7.25-an-hour minimum."
- "'We are not opposed to minimum wage increase, unless its directed exclusively at us,' said Wal-Mart U.S. President Bill Simon, referring to an attempt by the District of Columbia city council to require big retailers to pay starting wages that are higher than Washington's minimum wage."
- "Wal-Mart spokeswoman Brooke Buchanan said the company's official position hasn't changed and it remains neutral on whether or not the minimum wage should be increased. 'Just because we don't oppose it, doesn't mean we support it,' she said."
Takeaway: WMT supporting a hike in the minimum wage law is like AMZN supporting a federally imposed online sales tax. Intuitively it doesn't make sense, but it does level the playing field. WMT and AMZN are big enough to handle the fallout from these respective changes in policy, but its competition would be much harder pressed because of the disparity in scale.
comScore Reports $56.1 Billion in Q1 2014 Desktop-Based U.S. Retail E-Commerce Spending, Up 12 Percent vs. Year Ago
- "comScore, Inc...today released its estimates of Q1 2014 U.S. digital commerce sales. Q1 2014 saw desktop e-commerce spending rise 12 percent year-over-year to $56.1 billion, marking the eighteenth consecutive quarter of positive year-over-year growth and fourteenth consecutive quarter of double-digit growth. M-commerce spending on smartphones and tablets added $7.3 billion for the quarter, up 23 percent vs. year ago, for a digital commerce spending total of $63.4 billion in the first quarter."
- Other highlights from Q1 2014 include:
- The top-performing online product categories were: Apparel & Accessories, Consumer Packaged Goods, Sport & Fitness, Digital Content & Subscriptions, and Home & Garden. Each category grew at least 13 percent vs. year ago.
- Desktop E-commerce accounted for 11.7 percent of consumers’ discretionary spending, the highest first quarter share on record.
- Of the additional $7.3 billion in mobile commerce (m-commerce), purchasing using smartphones accounted for 62 percent vs. 38 percent from tablets.
What's Selling: Women's
STELLA MAE, Burlington, Vt.
- Frye Sabrina boot
- Clarks Caslynn Cheryl wedge sandal
- Victoria Classico sneaker
Spring trend: “We have a big assortment, so really there isn’t one trend that people will come in to find. For summer, we’ve been selling a lot of sneakers and wedges — both high and low,” said store manager Laura Cunningham.
GOODMAN’S SHOE STORE, Indianapolis
- Naot Kirei Mary Jane shoe
- Mephisto Helen sandal
- Bernie Mev Comfi slip-on
Spring trend: “We’re custom-oriented, so most of our clients are more focused on fit and foot problems, but when we get into spring and summer, we really sell Naot more than anything,” said manager Matt Ivan.
SCARPA, Charlottesville, Va.
- Coclico Sela sandal
- Attilio Giusti Leombruni oxfords
- Lola Cruz Toe-Ring Sandal
Spring trend: “Clients are buying more Birkenstocks than they were a few years back, and more people are picking up lace-up oxfords than in years past,” said merchandising and store manager Susie White.
DEBRAS BOUTIQUE, Mobile, Ala.
- Pura Lopez wedges
- Rag & Bone Wyatt bootie
- Dolce Vita Nona heel
Spring trend: “Funky shoes that aren’t so matchy-match are very popular,” said store associate Chad Chappell. “And things that are versatile sell well.”
SCC, SHLD - Sears Canada Announces Sale of its Minority Interest in Trois-Rivières Joint Arrangement
- "Sears Canada Inc. announced today that it has entered into an agreement for the sale of its 15% minority ownership interest in the Centre commercial Les Rivières shopping centre in Trois-Rivières, Quebec, a joint arrangement the Company holds with affiliates of Ivanhoé Cambridge, for pre-tax consideration of $33.5 million. Ivanhoé Cambridge is purchasing the 15% interest that it does not already own from Sears. The transaction is subject to customary closing conditions and is scheduled to close on June 2, 2014."
- "Sears will continue to operate its department store in the shopping centre, and Ivanhoé Cambridge will continue to manage the property."
BRBY - Burberry Renews Part of Japanese License With Sanyo
- "...Burberry has inked a new license with Sanyo Shokai Ltd. for its Blue and Black label collections."
- "As reported, Burberry plans to take its Japanese business in-house next year when its current license with Sanyo expires. The move is aimed at bringing the Japanese offer upmarket and in line with Burberry’s worldwide distribution."
- "On Monday, Burberry and Sanyo announced a new, three-year agreement that sees the British brand licensing its sporty, premium Black and Blue lines, which are both aimed at a younger audience, to Sanyo. Those lines will no longer carry the Burberry name, but will continue to be owned by the British brand."
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Takeaway: Monetization has been TWTR's largest growth driver, but will soon emerge as its biggest headwind as the runway is shorter than most think
- WHAT'S DRIVING TWTR'S GROWTH: Monetization has been TWTR's largest source of growth since 3Q13.
- WHAT'S DRIVING MONETIZATION: We believe it is increasing supply more than anything else.
- WHAT ABOUT INDUSTRY-LOW AD LOAD: That is inclusive of desktop, which it is barely monetizing.
- WHEN DOES MONETIZATION TURN: Growth begins decelerating in 2H14/2015 when it starts comping against the 2Q13 supply shock.
WHAT'S DRIVING TWTR'S GROWTH?
TWTR has received a string of upgrades as of late, largely on the basis of valuation. However, we do not believe the sell-side is giving due consideration to what is really driving the TWTR's growth trajectory.
TWTR defines its three growth drivers as:
- User Growth: Monthly Active Users (MAUs)
- Engagement: Timeline Views/MAU
- Monetization: Ad Revenue/Timeline View
Over the last two earnings releases, the Street has soured over waning trends in MAUs and engagement. However, Monetization has been firing on all cylinders, driving accelerating growth dating back to 1Q13. The question is why?
We could just assume that TWTR enhanced its ad targeting ability, which drove the surge in ad engagements (which is how TWTR gets paid). However there's a more plausible and tangible explanation, which is increasing supply.
WHAT'S DRIVING MONETIZATION?
The metrics in the chart below are the sequential change in ad engagement and ad pricing as reported by management (-.86 correlation dating back to 2Q12). We believe the ongoing deceleration in pricing is a reflection of an accelerating level of available ad inventory (supply).
Twitter's ads are purchased through its self-service ad exchange, where the price is determined through a bidding process. We estimate the average cost/ad engagement (price) has cumulatively declined 85% over the last 2 years. We believe a surge of increasing ad inventory led to this decline; The tight correlation between ad engagements and pricing during the period suggests rising supply has been its largest source of monetization growth.
BUT WHAT ABOUT ITS INDUSTRY-LOW AD LOAD?
This may be true, but this statement is inclusive of the desktop, which TWTR is barely monetizing. The overwhelming majority of its revenue and growth has been driven by mobile. In 1Q14, desktop revenue grew only 15% y/y (vs. 197% on mobile). The relatively sluggish desktop growth reinforces our view that TWTR's desktop UI is poorly designed for monetization. That said, mobile will likely remain its key source of revenue growth.
However, the very important distinction between mobile and desktop is screen size. TWTR can only add so much ad inventory on its mobile platform before pushing users away.
WHEN DOES MONETIZATION TURN?
It's hard to pinpoint the quarter, but we're expecting monetization growth to decelerate meaningfully beginning in 2H14 and into 2015. That is because of what happened during 2Q13; the quarter that TWTR saw its sharpest drop in ad pricing (-46% q/q), which we believe corresponds with its sharpest surge in supply.
TWTR has benefited from the 2Q13 supply shock in each subsequent quarter since on a y/y basis. And while pricing has continued to decelerate each quarter since (hence supply has risen), it hasn't been to the same magnitude as 2Q13.
When we look out to 2015, consensus is assuming 61% revenue growth (on top of the 91% consensus growth in 2014). We've already seen waning growth in Users and Engagement, which means monetization needs to pick up more of the slack next yeart.
That said, it will only get tougher to comp against that 2Q13 supply shock in 2H14/2015, because the more supply TWTR introduces moving forward, the more likely they are to push mobile users away.
If you have any questions, or would like to discuss in more detail, let us know.
Hesham Shaaban, CFA
Tickers: BYD, H, VAC
EVENTS TO WATCH
Monday, May 19
- Louisiana revenues out for April
Tuesday, May 20- Wednesday 21
- East Coast Gaming Congress
Tuesday, May 20 -Thursday May 22
- G2E Asia - The Venetian Macao
BYD – William Boyd, Vice President, sold 12,000 shares of stock on Wednesday, May 14th at an average price of $11.02, for a total value of $132,240.00. Mr. Boyd now directly owns 33,960 shares in the company.
Macau Legend 1680.HK – Chief executive David Chow Kam-fai acquired 24.8 million shares in the company from April 30 to May 14 at an average of HK$5.79 each. The chief executive now owns 31.35% of the outstanding shares.
Melco Int’l Development 200.HK – Chief executive Lawrence Ho Yau-lung acquired 2.8 million shares from May 9 to 12 at an average of HK$23.59 each. The additional shares increased his holdings to 48.93%.
VAC – J Marriott, Jr. sold 25,220 shares on Tuesday, May 13 at an average price of $57.11. Following the transaction, the insider now directly owns 313,464 shares.
Takeaway: Interesting that insiders of US listed companies are selling while insiders in HK-listed Macau gaming operators are buying shares.
MHGC – Vector Group disclosed a 6.4% stake, strongly supports the potential sale or merger of the company, communicated to the company’s board that the company should be sold in a transaction to maximize stockholder value.
Takeaway: More activism at this company.
H – announced the Company's Board of Directors authorized the repurchase of up to an additional $300 million of the Company's common stock. The Company currently has approximately $385 million remaining under its repurchase authorization.
Takeaway: Recycling proceeds from non-core businesses into share repurchases, we like this trend at Hyatt.
Silversea – drops Yalta, Sevastopol, Odessa from 4 Black Sea cruises (Seatrade Insider)
Citing the continued unrest in Ukraine, Silversea Cruises modified the itineraries of four Black Sea sailings that were scheduled to call at Yalta, Sevastopol or Odessa this year. Silver Spirit's July 21 seven-day cruise will remain entirely a Black Sea itinerary with Turkey's Trabzon replacing Odessa, while three new nine-day voyages will focus on destinations in Greece and Turkey, and also retain the original Black Sea ports of Constanza and Nessebur.
Takeaway: More Black Sea calls canceled
Macau Junket Vetting – (Macau Business Daily) The Gaming Inspection and Coordination Bureau is being asked to review a licence issued to a junket operator that promotes VIP rooms. The request was sent by the International Union of Operating Engineers, a US trade union, and ‘provides detailed information on a junket owner who has been a business partner in separate ventures with Chan Seng Leong and Si Cheng Wan, two members of the 14K triad headed by Wan Kuok Koi (also known as ‘Broken Tooth Koi’).’ Chan Seng Leong and Si Cheng Wan previously had connections to Pun Chi Man, the owner of three gaming promoter licenses.
Takeaway: Union head Jeff Fiedler has been particularly punchy (or Pun Chi if you will) as of late when it comes to Macau.
UnionPay – (Macau Business) Two men have been arrested in Macau in a crackdown on the use of China UnionPay mobile swipe card devices. Press reports indicated police officers stopped the men as they took a taxi from a casino on Cotai. Officers said the pair were found with two of the mobile devices, HK$690,000 in cash and HK$500,000 worth of casino chips. The men ages 25 and 30 are from Fujian province. The arrests were the first since a Beijing-backed crackdown on the use of the payment devices was launched.
Takeaway: Poster story for the crackdown.
UnionPay – (Macau Business Daily) Secretary for Economy and Finance Francis Tam Pak Yuen dismissed the suggestion that there will be new rules on the use of China UnionPay cards in Macau come July. However, Mr. Tam also stressed the Macau government will step up the rules if needed. “We have always had measures ready [regarding the UnionPay cards] were there such a need,” said Mr Tam. “But at this moment we’ve not reached the step of issuing clear guidelines to stop some activities at a certain date.” The government is “closely monitoring” the situation and “will strengthen supervision if needed”, the secretary added.
Takeaway: Maybe no new formal rules but casinos have already moved UnionPay retail outlets off the casino floors.
Bird Flu - Health authorities in south China's Guangdong Province on Saturday reported two more human cases of H7N9 bird flu infection. A 37-year-old man, a native of Zhongshan City, was confirmed to have been infected with H7N9 virus on Friday, and the second case was reported in the city of Meizhou, where a 86-year-old man was confirmed to have contracted the virus. Both of the patients are in critical condition.
Takeaway: Investors no longer react to bird flu scares.
Online Gaming – A national group of legislators from states where gambling is legal is recommending standards that states considering legalizing Internet gambling might adopt. The National Council of Legislators from Gaming States issued a framework for state legislatures to consider as they ponder legalizing Internet gambling, which is currently legal only in Nevada, New Jersey and Delaware. It says it does not take a position for or against Internet gambling.
Takeaway: Stay tuned, this debate feels like it's about to get hot...
China to allow Provicial Municipal Funding – (WSJ) China will allow 10 provinces and cities to sell bonds on their own credit later this year, introducing the country's first Western-style municipal bonds as it broadens financing channels for local governments.
Takeaway: Another sign the Chinese Central Government can no longer support all the required financial needs of the provincial governments?
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.
Takeaway: Tightening spreads and widening interbank risk measures should have investors keeping the defensive team on the field.
********** High Frequency Trading Conf Call This Thursday **********
We will be hosting a conference call with former SEC Commissioner Roel Campos this Thursday, May 22nd at 2pm EST to weigh in on the current structure of the equity and derivative markets and how regulation around High Frequency Trading (HFT) may come down from regulators.
Mr. Campos served as one of the five commissioners of the Securities and Exchange Commission under Chairmans' William Donaldson and Christopher Cox from 2002 to 2007 and was instrumental in crafting the Commission's National Market System (Reg NMS) framework. Mr. Campos recently testified in front of the House Financial Services Committee in February of this year in a Hearing entitled "Equity Market Structure: A Review of SEC Regulation NMS."
CLICK HERE to add this Hedgeye Speaker Series call to your Outlook calendar; otherwise, the dial in instructions are also below:
Participant Dialing Instructions
Thursday May 22nd at 2 pm EST:
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 189818#
This call should be of interest to investors in the following stocks:
NDAQ, CME, ICE, GS, MS, BLK, & JPM
Current Best Ideas:
Two important callouts this week include the yield spread compression and the rising Euribor-OIS spread.
* 2-10 Spread – Last week the 2-10 spread tightened to 216 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
* Euribor-OIS Spread – The Euribor-OIS spread widened by 2 bps to 19 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 0 of 12 improved / 6 out of 12 worsened / 6 of 12 unchanged
• Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Positive / 3 of 12 improved / 2 out of 12 worsened / 7 of 12 unchanged
1. U.S. Financial CDS - Swaps widened for 21 out of 27 domestic financial institutions, but were wider by just 2 bps week-over-week.
Tightened the most WoW: ACE, ALL, CB
Widened the most WoW: COF, AXP, PRU
Tightened the most WoW: PRU, MET, GS
Widened the most/ tightened the least MoM: BAC, SLM, GNW
2. European Financial CDS - Swaps were notably widener in Europe last week, but remain modestly tighter month-over-month. Greek banks, which have seen their swaps tighten steadily for months now widened sharply.
3. Asian Financial CDS - Indian banks were notably tighter last week, coming in by an average of 39 bps and are now tighter by almost as much on a month-over-month basis.
4. Sovereign CDS – Sovereign swaps widened last week. Italian sovereign swaps widened by 11% (11 bps to 113) and Portuguese sovereign swaps widened by 18% (27 bps to 180).
5. High Yield (YTM) Monitor – High Yield rates fell 2.2 bps last week, ending the week at 5.51% versus 5.53% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 3.0 points last week, ending at 1869.
7. TED Spread Monitor – The TED spread rose 1.0 basis points last week, ending the week at 21.1 bps this week versus last week’s print of 20.11 bps.
8. CRB Commodity Price Index – The CRB index fell -0.4%, ending the week at 306 versus 307 the prior week. As compared with the prior month, commodity prices have decreased -1.8% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 19 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 13 basis points last week, ending the week at 2.35% versus last week’s print of 2.22%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 1.6% last week, or 52 yuan/ton, to 3,258 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 216 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.8% upside to TRADE resistance and 1.4% downside to TRADE support.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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