The commission cap, according to DM, will help the concessionaires become more profitable.  There is a valid fear that side-betting could become more prevalent but overall the cap should result in EBITDA growth for the operators.  While the authorities have made it clear that the cap applies to all forms of compensation, cash and non-cash, it is very difficult to measure the non-cash side of the business let alone police it.


DM sees credit as the most important factor for players; they will go wherever they can get the longest credit line.  Having deep pockets and having good debt-collecting agents could now be more crucial to concessionaires’ profitability than ever.  SJM and Galaxy shot up when the commission cap news emerged this week.  Wynn could benefit from the return of customers previously lost due to more aggressive commissions elsewhere. 





SJM has announced its intention to raise HK$2bn from a convertible bond.  With visitation and revenue numbers looking healthy, commission caps coming into place, and the 60th Anniversary of modern China approaching, valuations are being pushed up.  DM speculates that the money will be used either to play the stock market or to fund credit lines for junkets. 

The five-year bond will have a zero coupon and be convertible to SJM stock at a price of HK$2.25 from December 8.  Today’s share price was HK$4.35.





DM cites an analyst’s warning that Macau gaming stocks are becoming inflated and becoming a bubble as overcapacity threatens to drive down ROIC and over-excitement about visa-easing and commission caps push share prices up rapidly.  The one stock that is recommended by this commentator is SJM.  The reasons include, dominant market share, superior ROIC, right market-segment focus, improving profitability and a superior balance sheet. The source also claims that SJM is trading at a discount compared to its peers.





Steve Wynn held a press conference during the week prior to Wynn Macau’s IPO on the Hong Kong stock exchange.  When asked if he feared losing direct-VIP clients to the Singapore resorts when they open early next year, his response was that he has Linda Chen and the don’t (fear losing business to Singapore).  DM exalts Wynn and Chen’s track record in the VIP baccarat business and believe they will continue to outperform in that area when Singapore is open. 


Regarding the stock price, some commentators are claiming that once the stock starts trading at HK$10, much of the upside is priced in.





L’Arc has had a strong few days since opening.  The mass floor is said to have done quite well. It remains to be seen how the business will far when the SJM new business operations team hand over to the L’Arc team.




Japanese August Trade data was released this morning, with export levels registering at a year-over-year decline of 36%. This is the 10th consecutive month in which exports have shown a decline of greater than 25% from the same month in the prior year.


There were some slender positive data points in the otherwise abysmal data, including Motor vehicle exports headed for China which turned positive on a year-over-year basis at 0.53%, although shipments to “The Client in total still declined by 27% over last August. At only slightly more than 5% of the total (greatly diminished) car shipments heading abroad, not enough cars are heading to China to offset the slack demand elsewhere and total vehicle exports came in at -49.8% Y/Y, a marginal sequential improvement after the seven prior months of levels lower than -50%.


We have maintained a short position in Japanese equities via EWJ since the first week of July, sticking to our conviction as the data emerging has continued to indicate nothing but stagnation and frustration for the land of the rising sun regardless of stimulus band aids concocted by the last administration (and with eth ones being proffered by the new government looking equally impotent).


Andrew Barber




HOUSING – Getting Too Comfortable At Home

Today, the NAR reported that sales of existing homes dropped 2.7% month-over-month in August.  Consensus expectations were for home sales to rise 2% in August.


After last month’s bullish new home sales data, we had to take a step back and question the sustainability of the improving housing trends when most consumers continue to suffer.  Clearly, the one big sticking point continues to be high unemployment, which puts real consumer demand in question. 


The slowdown in August (which will likely continue into September) can be attributed to a couple of reasons.  First, we are past the home sales PEAK SEASON (for those consumers with “need based” moves).  Second, the NAR said “first-time” buyers purchased 30% of homes in August which remains unchanged from July.  To that end, it appears that the Government home-buyer stimulant is ending and having less of an impact on sales trends.   


Given the time it takes to buy a new home, it’s less likely that “first time” buyers are going to close in time to take advantage of the Government subsidy.  Therefore, as a % of total buyers, “first time” buyers are going to fall off rather significantly in the coming months. 


Howard Penney

Managing Director


HOUSING – Getting Too Comfortable At Home - a2

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We are short the Pound


One of the mottos inscribed on the side of some Pound coins, “decus et tutamen” is a Latin phrase meaning: “an ornament and a safeguard”, a reference to the ridged edges that were developed in centuries past to prevent thieves from clipping tiny pieces of the valuable metal before passing the debased coin back into circulation. In the present, the coin of the realm has been debased by forces that will require more than clever minting techniques to correct.


The Pound Sterling initially collapsed in the vacuum leading up to and following the collapse of Lehman Brothers in September of 2008, and bottomed in late January; conversely the dollar began its burn in March of this year and currently teeters with lows not seen since the abolishment of the gold standard in 1971, except for those of mid ’08. On 9/22 we shorted the Pound via the etf FXB.


This year we’ve repeatedly discussed the imbedded financial leverage associated with the UK economy. Not only have we failed to see leadership from the likes of Brown and King to direct fiscal and monetary policy in a direction that could move the country out of recession, but also ballooning public debt—which currently stands at 13% of GDP (according to a Alistair Darling’s most recent budget statement)—worries us not only in the near term, but on the TAIL (3 years or less) as it should hover well over “acceptable” levels well into 2010 and 2011. Below we’ll discuss our fundamental view on the UK, which we shorted via the etf EWU on 9/9, and our rational for shorting the Pound.


Certainly the extent of the UK’s financial leverage (as opposed to its Western European peers) has prolonged the ability of its major financial institutions to recapitalize and restore confidence, including the ability to extend credit into the broader economy (from first time home owners to larger institutions) to get the economy moving.  As in the US, this process has been rocky and politicized, with pressure ultimately exerted on the banking community to ensure that credit trickled into the consumer markets. This easing may have stemmed the trajectory of the contraction, but did little to spark recovery: Q2 GDP figures saw a clear divergence with Germany and France improving +0.3% Q/Q while the UK contracted -0.7%.


While the cost of mortgages and loans have been reduced parallel to the BOE benchmark as it descended to its lowest level ever, 0.5%, broad fundamentals still appear anemic (despite some areas of measured improvement) and we believe they’ll contribute to the country’s ongoing underperformance. 


Consumer and business confidence measures for the island economy (not unlike the Eurozone) have improved over the last few months, especially on future expectations, yet there are a slew of data points and metrics that suggest the pain is not over. Unemployment continues to increase sequentially in the UK, not unlike some of its more diversified continental neighbors. Should it continue its upward trend in the next two quarters, which we expect, we’re likely to see erosion in sentiment that will likely carry over to broader fundamentals. Retail sales and housing have yet to yield a discernible trend in either direction over the year, yet should sentiment fade, spending, the housing market, and output could follow with a pullback.  UK inflation (CPI) currently stands at 1.6% in August Y/Y and although it’s come down on an annual basis over the last months, it is still well ahead of the Eurozone average of -0.2% in August. We think in the near-term that UK inflation has gotten ahead of growth and that in the intermediate term it will stay there.


Finally, it’s worth considering the components of GDP.  The UK economy is a net importer and from January to June 2009 registered the largest deficit of the 27-country EU, at -46.4 Billion EUR. With Investment and Consumer spending down, this leaves government spending as the sole component to generate growth. As we’ve noted above, the ballooning debt, with borrowing at 175 Billion Pounds this year, and a cocktail of “socialist” measures from Brown like raising the income tax on top earners (150,000+ Pounds) to 50% from 45%, shall hinder GDP performance. We think this TAIL risk has contributed to discontent with the Brown government and the underperformance of the FTSE against most global indices.


From a currency perspective, despite the low interest rate environment in Europe [BOE at 0.5% and ECB at 1.0%] both the Pound and Euro have outperformed the degraded US Dollar during its YTD descent.  We’ve made our thesis on “Burning the Buck” abundantly clear and the chart below helps illustrate the gains for currencies on the other side of the trade.  Versus the dollar the Pound is up +13.3% YTD, while the Euro has gained +6.4% in the same period.  In the Chart below, the BOE trade weighted Index reflects this pressure.  While the Pound is well off its 2008 levels versus the USD and Euro, affording cheaper cost for buyers of UK exported goods, we’ve yet to see a noticeable pick-up (with some notable exceptions) due to the poor competitive stance of many sectors of the country’s industrial sector.


Along Keith’s call for reflation to morph into inflation in Q4 in the US, with it we expect to see (literally or rhetorically) a boost in interest rates. Associated with a hike should be a stronger dollar, which we believe should depreciate the value of the Pound as it has moved significantly against the USD, but also versus the Euro (+5.4% YTD), despite a negative fundamental outlook in the UK. Price momentum dictated our call to short the Pound, yet we believe the fundamentals support our call.  



Matthew Hedrick





Jimmy Choo, Where are You?

Jimmy Choo, Where are You?

SEPTEMBER 24, 2009



TODAY’S CALL OUT: Jimmy Choo, Where are You?


As the fashionistas prepare for the arrival of Jimmy Choo’s at H&M this Fall, we suspect management is also awaiting some positive sales developments in the wake of disappointing 3Q results. This fast fashion retailer appears to be the victim of low inventory levels leaving an inability to drive revenues. August sales, which were the weakest for H&M since 2005, were clearly impacted by a lack of clearance/markdown inventory after the company’s “summer sale” left inventory levels too lean. As such, 3Q results missed both sales and profit expectations.


Despite a disappointing quarter, H&M is increasing its store expansion for the full year from 225 stores to 240 stores and announced the launch of an e-commerce platform for fall 2010 in the UK.  Regionally, sales were strong in Sweden, Norway, Germany, China, Japan, and Russia but weak in Spain, the US, and France.  Warm weather, pricing competition, and the recession were blamed for the weak sales.  Gross Margins improved 80 bps due to currency hedges (and likely lack of clearance!). 



Jimmy Choo, Where are You? - H MSGIMA


Jimmy Choo, Where are You? - H M Sales chart




Retail Trading Call-Outs:


Jimmy Choo, Where are You? - stock chart





Some Notable Call Outs


  • Despite solid same store sales growth of 5.4%, AutoZone continues to see discretionary product underperform within the merchandise mix. Sales growth, as has been the case for the past couple of quarters, continues to be driven by “maintenance” products. Items such as oil filters, wiper blades, and brake pads define this category and are seeing strength as consumers look to take care of their autos proactively in the difficult macro environment. From a regional standpoint same store sales were consistent throughout the country with no notable callouts.


  • With only a token $20 million worth of share repurchase activity in 2Q, Bed Bath and Beyond is likely setting up to put some of its $1.2 billion cash balance to work. The balance sheet remains debt free and square footage growth should remain close to 6% for the next year or so. This is all sets up nicely for the company to tap the $900 million remaining in authorization in the near-term. Of course management would never signal its plans for when they’ll be buying, but with interest rates near zero, the cash balance certainly has better uses.


  • As K-Swiss looks to build momentum with its recently launched performance running shoes, they are also at work re-launching their newly acquired Palladium boot brand. In addition to two prominent billboards promoting the brand, one in Soho and the other in Williamsburg, the company’s ad agency also put together a time lapsed video of the Soho billboard being painted. Yes, they still paint billboards in NYC. Check it out:





-Living wage campaign to be launched - Worker organisations in Asia are launching a campaign named "Asian Floor Wage Campaign" in October to demand international apparel buyers and big apparel brands to pay a few cents extra for their purchases as a way to ensure decent wages for garment workers. The campaign will also ask for support from trade unions and consumer movements in the US and EU, the main export destinations of apparel from Asia. Trade unions believe that big western retailers like Walmart,Carrefour, Tesco,JC PenneyandMarks and Spencerare in a position to force their low purchasing prices on garment manufacturers in Asian countries due to the global economic slowdown. The Asian Floor Wage sets a standard basic wage for garment workers across Asia, based on cost of living. It is currently calculated at 475 international dollars (using the purchasing power parity method of the World Bank) for Asian countries. <>


-The Brazilian Association of Footwear Industries (Abicalcados) has asked the Ministry of Development, Industry and Foreign Trade to remove Vietnam from a list of countries being sued for dumping their shoes on the domestic market. The proposal was made after Brazil's Trade Protection Agency got the results of its investigation of Vietnamese shoemakers. Currently, China is the only defendant in the lawsuit. The Abicalcados’s move is expected to offer an opportunity for Vietnam’s footwear enterprises to increase their share and improve their competitive edge in the Brazilian market. The Abicalcados submitted the anti-dumping petition to the agency on October 30, 2008, asking for a probe into the imports from Vietnam, China and several other countries. Investigations were launched on December 15 and the agency found that Vietnamese shoemakers did not damage the Brazilian shoe market. The Vietnam Leather and Footwear Association said the volume of footwear exported to Brazil was relatively small, reaching almost US$40 million between January-November 2008. <>


-Global mergers-and-acquisitions activity remains low - In its preliminary third-quarter report, released Wednesday, Mergermarket noted that the number of announced deals in the first three quarters of 2009 ranks the lowest, at just 1,759, since the same period in 2003. The value of transactions completed to date — $978.9 billion for 5,914 deals — is 48% below the volume in the first three quarters of 2008. According to the report, “The passing of the financial crisis appears to have made little impact on the established M&A league tables, at least for now.” Mergermarket points to the U.S. as having the highest near-term potential for increased M&A, although the U.S. mergers market has declined by 41% in volume year-to-date in 2009, and 34% in value. M&A in the Asia-Pacific region dropped 25% in both volume and value in the first three quarters of 2009. The European M&A market, meanwhile, declined 70% in value and 48% in volume in the first three quarters. However, Mergermarket pointed out that the Russian consumer retail sector is one area of interest for private-equity firms, because profitable Russian retailers are in need of capital. <>


-EU: Textile manufacturers exempt from carbon auctioning - Key elements of the textile and clothing industry in the EU are likely to be exempt from the EU's plans to auction carbon dioxide emissions permits from 2013. According to the draft list of businesses that are under exemption released by the European Commission, selected industries including manufacturers of cotton, wool, silk, flax-type fibres, dyes, underwear, knitted and crocheted clothing would have free carbon credits from 2013 to 2020; pollution permits would be capped at the 2007-8 levels of the most efficient 10% of companies in a particular sector.  <>


-GE, B of A in Finance Deals With BCBG and Quiksilver - The corporate retail finance group of GE Capital as well as Bank of America are the co-agents of a $400 million asset-based credit facility to BCBG Max Azria Group. The BCBG loan will be used for working capital needs, according to GE Capital. The facility may be increased to up to $450 million if certain conditions are met. GE Capital is the co-collateral agent on the facility, while Bank of America, the other co-lead, is administrative agent. BCBG is a Vernon, Calif.-based firm founded in 1989, and has more than 13,500 retail and wholesale sites worldwide. Its portfolio has 22 brands, including BCBG, Max Azria and Hervé Léger. “GE delivered the liquidity and flexibility we needed to grow our business,” said Ben Malka, BCBG’s president, who added that the loan will help the firm expand its new Miley&Max line for Wal-Mart Stores Inc. GE’s corporate retail finance group also acted as collateral agent on a $200 million asset-based credit facility for Quiksilver Inc., for which GE Capital Markets was the co-lead arranger along with Bank of America. The loan will be used for working capital needs in the Americas. <>


-Duran Outlines New Lacoste Strategy - José Luis Duran, the new chief executive officer of Devanlay SA, Lacoste’s global apparel licensee, attended his first-ever fashion show in the Bryant Park tents earlier this month. While Duran is a newcomer to the fashion arena — even he called Carrefour’s apparel business “weak” — his core expertise in branding, international operations and retail management will be brought to bear on Lacoste. Duran said he plans to focus on three key areas of the business, which last year rang up sales of almost one billion euros, or $1.47 billion at average exchange. First, Devanlay is striving to establish a global Lacoste e-commerce business; second, the company is aiming to expand key items beyond the iconic crocodile logo polo shirt, and, third, it plans to expand Lacoste’s presence in emerging markets, which are primed for growth. <>


-Sport-Haley gets Como license - Windsong Brands LLC has licensed Sport-Haley Inc., a Denver-based golf apparel specialist, to produce and market men’s and women’s sportswear under Windsong’s Como Sport brand. <>


-H&M is to start selling online - in the UK from next autumn, following the decision made by its fast fashion arch-rival Zara to do the same last week. The announcement came as the Swedish fashion giant revealed third-quarter pre-tax profits were slightly higher than expected, although August sales were heavily down. H&M, the world’s third-biggest clothing retailer by sales, says pre-tax earnings in the nine months to the end of August were up 4% to 4.77 billion Swedish Kronor (£428m) compared with a forecast SEK4.75bn (£426m), and SEK4.59bn (£412m) last year. <>


-Advance Auto Parts advances its e-commerce initiative - Nearly seven months after dissolving, which Advance Auto Parts Inc. jointly operated with CSK Auto Inc., the automotive parts retailer is gearing up its own e-commerce initiative. Early in the fourth quarter, Advance Auto Parts, No. 261 in the Internet Retailer Top 500 Guide, will launch a new e-commerce site. While key details of the site have yet to be released, the new site will have advanced features and functions, including a buy online/pick up in store program, says an Advance Auto Parts spokeswoman. “We expect to go live with the new web site early in the fourth quarter,” the spokeswoman says.  <>


-Brooks to sponsor Rock 'n Roll Marathon Series over New Balance and Sugoi companies - Brooks Sports has reached an exclusive and multi-year agreement with The Competitor Group to become the official footwear and apparel partner of the Rock 'n Roll Marathon Series beginning in Spring 2010. Currently, New Balance is the footwear sponsor and Sugoi is the apparel sponsor. <>


-Local Names Maria Pinto, Lee Allison, and Hart Schaffner to Design Apparel for Olympic Delegates -  When the women of the Chicago 2016 delegation speak before the IOC next week, the outfits they'll be wearing will be designed by Maria Pinto. Designer Lee Allison has been working with Chicago 2016 for awhile and all the neckties and neckscarves worn next week are his creation. Putting the men in suits fell in the capable of hands of legendary Chicago clothiers Hart Schaffner Marx, who like Pinto and Allison, won't reveal anything about their creations for next week. <>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): KR, DKS


09/23/2009 10:43 AM


Kroger is up on the day and Levine doesn't do Krogering "on valuation"... Valuation is not a bullish catalyst. Trends here are nasty. KM


09/23/2009 03:07 PM


Buying after my team just met with the company in Pittsburgh. There is still 15% short interest here and plenty hedge funds hanging around in McGough's 2 year old short thesis. KM







VFC: Rust Sharp, Director, sold 4,800shs ($347k) after exercising the right to buy 4,800 shares nearly 70% of total common holdings.


M: Karen Hoguet, CFO, sold 11,500shs ($219k) after exercising the right to buy 11,500 shares less than 15% of total common holdings.


KSS: Wesley McDonald, EVP & CFO, sold 2,000shs ($112k) after exercising the right to buy 2,000 shares roughly 5% of total common holdings.



The stock has blown through normal valuation constraints but the catalysts remain generally positive.




1.  Macau is ripping

  • up 18% off a 40% August comp
  • up 60% MTD in September

2.  October should be huge in Macau

  • 60th anniversary of founding of People’s Republic of China is October
  • 9 holiday days this October

3.  Earnings are going higher – We are projecting $295 million in company EBITDAR for Q3 vs the Street at $250 million

4.  Easy monthly comparisons

5.  Stimulus and liquidity boosting VIP

6.  Visa restrictions were loosened

7.  On track for IPO

  • Likely a high multiple 12-14x
  • Resolution of credit issues

8.  Macau is only gaming market with excess demand

  • Beijing controls the visitation spigot but wants growth
  • The high margin Mass business should grow every year for a long time
  • Mass is stable and predictable month to month

9.  Singapore opening in the spring

  • Investors may get excited into the opening
  • Could lead to a lower gaming tax rate in Macau

10.  Easier Las Vegas comparisons




1.  The “rip” is mostly lower margin VIP

  • The Venetian and Sands are primarily Mass market properties
  • LVS lost 5-6% of market share in September MTD versus August

2.  All good things come to an end

3.  The numbers will be higher for Q3 but some of that is hold %.  Both the Venetian and Sands are holding around 75bps above the normal range of 2.85-3.00%

4.  VIP comps are easy, Mass less so

  • Mass be in growth mode too but there are huge supply hurdles on the Mass side
  • 25% Mass table supply growth from December 2009 to May 2010
  • Sands will face a big competitor in Oceanus beginning in late December/early January.  The average analyst has Sands EBITDA up significantly in 2010 despite a new, direct competitor with a significant locational advantage

5.  LVS management not getting too excited about VIP given the volatility and tendency of this segment to “bubble”

6.  Beijing can always tighten visa restrictions again and will do so to prevent “overheating”.  This is good and bad.  Investors shouldn’t get too excited about near term surges or declines

7.  Probably cannot actually float the IPO until November.  Multiples could change in the interim

8.  Mr. Bear cannot really debate this one

9.  A lot of risk associated with such a large capital investment

  • Regulatory hurdles will keep junket involvement low – slows the ramp
  • Will cannibalize Macau operations – VIP tax rate is 30 percentage points lower
  • Will open after Genting
  • Can one really put a 14x multiple (as some on the sell-side have done) on Singapore EBITDA given the risks?  The property hasn’t even opened up yet!

10.  True, but is business really getting better in Las Vegas?  We have not seen any evidence of that




Catalysts and momentum drive LVS, MPEL, and WYNN.  Investors should never lose sight of that.  LVS may be expensive, but it can continue to run as long as the catalysts are positive.  However, at least for LVS, there are some warning signs that won’t matter until they do and then they will really matter. 

  • Mass table supply growth:  This is a big issue for LVS given the business model.  The opening of Oceanus will likely reduce Sands EBITDA next year, even if the market continues to boom.  Moreover, overall supply growth will be around 25% for the first half of 2010.
  • Potential VIP bubble:  Investors have gotten very excited about Macau market growth but most of it is in VIP which is very much a “bubble and pop” segment fueled by stimulus and liquidity.
  • Market share dip:  LVS may lose 5-6% in market share in September due to the VIP market surge.  Venetian and Sands are not getting their share of the market growth.
  • Check those models:  Many analysts are using the wrong share count in their models and target price derivations, forgetting the warrants that were issued earlier this year that are now in the money.  We wrote about this in our note entitled, “CHECK YOUR MODELS” (9/14). “For example, this week, one sell-side analyst upped his price target but is using 659 million shares, instead of the correct 815-825 million shares.  His new $24 price target should have been $19 and his rating should be Market Perform, not Outperform.  Look for that analyst to raise his property multiples even more to justify the rating when he figures out his error.
  • 14x EBITDA?  Analysts know this is a momentum group of stocks.  Target multiples continue to get raised as stock prices go higher.  Target multiples are starting to get to unreasonable levels.  For instance, we saw one sell-sider up his target multiple on Singapore to 14x, the same as his Macau multiple.  14x is high even for Macau but Singapore is not even open.  What about risk? 



For now the catalysts are positive.  In addition to the upcoming monthly Macau revenue growth prints, we actually think the Street is way too low on LVS earnings.  Our $295 million EBITDAR projection is 20% above the Street.  So the Bear thesis, however valid, probably won’t matter over the near-term.  We just want you to be prepared when it does.

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