Knapp Headlines Strong, But...

Last night Malcom Knapp released casual dining sales results for December, estimating that same-store sales increased +2.2% as guest counts decreased -0.5%.  As expected, restaurant stocks are rallying on the print.  While the headline numbers are strong, the underlying trend is quite the opposite, as same-restaurant sales and traffic declined -2.0% and -4.2%, respectively, on a two-year average basis. 


For the quarter, same-restaurant sales increased +1.5% as guest counts decreased -0.6%.  While 4Q, as a whole, was strong, December marked the second straight month of deceleration in the two-year trend of both measures, suggesting that the state of the casual dining industry isn’t quite as strong as people suspect. 


The reality is, we’re not going to fight the headlines and with another 2-3 months of weak comparisons on tap, we imagine sentiment surrounding restaurant stocks will remain high over the near-term.  However, we believe the recent run-up, which we properly positioned for, will soon provide us with a plethora of opportunities on the short side.


Stay tuned.


Takeaway: 200 tables on average could even be more than what the gov’t is willing to allocate – investors won't like that

300-500 tables per new Cotai casino looking increasingly unlikely



A reliable contact in Macau has indicated to us that the new Cotai projects may be allocated only 150 tables or less on average each.  The smaller than expected allocation would likely disappoint some investors.  Estimates of up to 550 tables for Wynn Palace and 400 for some of the other new Cotai properties have been offered.  WYNN management has been particularly bullish regarding their potential allocation.


In public commentary from both the Macau government and State officials from China including President Xi Jinping during his Macau visit, it has become clear that diversifying the economy away from gaming is a clear public policy goal.  We believe this is no longer just talk – active measures are being taken to achieve this goal.  A lower table allocation is certainly one measure.


With Galaxy Phase II opening in Q2 (mgmt expecting up to 500 tables), we should get a feel for numbers soon.  Galaxy may obtain one of the healthier allocations since they're a 1st mover and have built a solid relationship with the Chinese government. If they are allocated significantly below what is expected, it could be an ominous sign.


Investors would likely react negatively as projections tend to be made on a revenue per table basis.  Thus, fewer tables equates to fewer revenues.  We don’t agree with this modeling approach and would not necessarily view a 200 table allocation as negative based on current demand trends, at least over the short term.  After all, we expect cannibalization so table migration from existing properties should somewhat alleviate the problem of too few tables at new properties.  Moreover, dealer costs will be subdued.


However, if market demand improves, gaming revenue growth could be impeded by short supply.  Of course, this may be what the government wants and relatively small table allocations should be a signal that government is serious about curtailing gaming growth or at least slowing growth rates below that of non-gaming sources.  

Cartoon of the Day: What a Drag(hi)

Cartoon of the Day: What a Drag(hi) - Draghi cartoon 01.08.2015

Overcoming his denial about deflation has been a major challenge for ECB head honcho Mario Draghi. Reality is setting in as prices fall across Europe.

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Keith's Macro Notebook 1/8: Yen | Oil | SPX


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

LEISURE LETTER (01/08/2015)

Tickers:  LVS, WYNN, RLJ, NCLH


27.HK – a fire broke out and was quickly extinguished at the under construction Galaxy Phase 2. The small fire started in the area around a cupola in the roof area of the yet to be completed building. The cause of the fire is believed to be a welding torch.

Article HERE

Takeaway: An unfortunate incident but not likely to delay the opening of Phase 2.  


LVS & 1928.HK – has tenants for about 85% of the shop space it will let in the Parisian according to company executive David Sylvester. 

Article HERE


WYNN – The City of Boston has refused to accept a check for $1 million from Wynn Resorts, which would have been the operator’s first payment linked to a license to build a $1.6 billion resort in the state.  Wynn in turn delivered the check to the Massachusetts Gaming Commission offices to be held in escrow for the City, after the City refused to accept the check.

Article HERE

Takeaway: The Mayor of Boston continues to play hardball in hope of extracting greater financial remuneration from Wynn - ideally as a host city.


RLJ – announced that it successfully executed a $150.0 million unsecured Seven-Year Term Loan facility that will be deployed by the end of the second quarter of 2015. The Company is expected to draw funds once the prepayment windows for its 2015 CMBS debt maturities become available. 

Article HERE



Many Macau Residents Don't Gamble – About 34% of Macau people have never gambled in a casino. The survey, found that of the 416 Macau people questioned, 142 (34%) said they had never been in a casino to gamble, 51 (12%) said they gambled frequently and 223 (54%) said they gambled occasionally.

Article HERE


Operation Fox Hunt Nabs 680 Suspects – A total of 680 fugitives suspected of economic crimes have been repatriated to China as a result of the transnational "Fox Hunt" operation launched in July, according to the Ministry of Public Security. Of those seized, 117 had been at large for over a decade and one had been on the run for 22 years. Of the 680 suspects, 208 were involved in economic crimes involving over 10 million yuan (1.6 million U.S. dollars), 74 of which were involved in cases involving over 100 million yuan. Overall, 390 turned themselves in, with 332 doing so after Oct. 10, the date Chinese authorities announced that criminals that gave themselves up before the deadline of Dec. 1 would receive lighter punishment.

Article HERE


Top CPC Party Official Removed – Yang Weize, Party chief of Nanjing, capital city of east China's Jiangsu Province, has been removed from post for suspected "serious discipline and law violations."  Yang was also member of the Standing Committee of the CPC Jiangsu Provincial Committee.

Article HERE

Takeaway: Another Tiger nabbed. 


Additional Chinese Officials Detained – Five local-level officials have been questioned or arrested over allegations of corruption, according to the Supreme People's Procuratorate (SPP). Wang Baojun, who was former chairman of the municipal committee of the Chinese People's Political Consultative Conference of Hengshui in north China's Hebei Province; and Zhong Ji'an, former inspector of Hebei Provincial Commerce Department. The three additional officials include: Yan Cheng, vice president of a local state-owned bank in Inner Mongolia; Chen Yong, head of the energy bureau in Jiangsu Province; and Zhong Bingming, an official with the Jiangxi provincial poverty alleviation authority. All five have been placed under coercive measures which include summons by force, bail, residential surveillance, detention and arrest. 

Article HERE

Takeaway: Enforcement and crackdown actions continue despite repeated warnings by the CPC and Mainland officials.


Alabama Gambling Expansion – Facing a large shortfall in the State's General Fund, there is increased consideration for legalizing gambling. At present, Alabama does not have a state lottery nor legalized casino gambling.

Article HERE


China Netcom Technology  – released its first electronic lottery terminals to the Chinese Sports Lottery in Hainan province. China Netcom provides technology products for lotteries in China.


South Korean Cruise Industry – South Korea’s Prime Minister Chung Hong-won has urged the country’s parliament to pass 14 pending motions aimed at boosting the economy, including one for promoting the cruise business. Asia’s cruise industry is expected to treble in size by 2020, with an onboard gambling component seen as a crucial offering to attract Chinese tourists. The Asian Cruise Association estimates that the overall Asian market could expand from 1.3 million passengers in 2012 to 3.8 million in 2020, including 1.6 million from China. Between 2008 and 2013, capacity in the Asian cruise industry has increased 302 percent based on a recent industry report.

Article HERE


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Retail Callouts (1/8): DKS LBO, LULU CFO, PVH, FDO, AMZN, EBAY, TGT

Takeaway: If we were Ed Stack we'd be speed dating too. LULU brings in Haselden to shore up Finance department. PVH shuts down Izod DTC operation.



Today (1/8)

FDO - Earnings Call: 10:00am

BBBY - Earnings Call: 5:00pm




DKS - Dick’s Sporting Goods explores going private



Here's yet another example of a company that leaks out a one-liner talking about going private, and all of a sudden public markets get more excited about it. These are early stage discussions, which in no way, shape or form means that DKS actually will, in fact, go private.


Based on our LBO model (ping us is you want a copy), a DKS LBO at the current price -- and even 20% lower -- makes no financial sense. The IRR is negative in both instances.


To be clear, our model assumes…

  1. DKS tops out at 900 stores by 2018, below management's 1,100 goal
  2. 2% comp store sales growth as e-commerce offsets negative store traffic.
  3. Gross Margins fall by 50bp annually as e-commerce dilutes profitability, and aggregate sales growth is not strong enough for DKS to leverage occupancy costs.
  4. EBIT margins fall from 8% today to 5% in 2018.

The problem, however, is that DKS hired a banker that will use the inverse of our model as it shops the company around. Any PE investor worth its salt will see through bulled-up banker assumptions in a heartbeat. But if there's just one that's gullible enough think that DKS can grow its store base to 1,100 while improving margins at a low-mid single digit comp, then DKS might very well have a suitor. If I was Ed Stack (with 61% of the voting stock) I'd be speed-dating to find that partner.



LULU - lululemon athletica names stuart c. haselden chief financial officer



Takeaway: New CFO Stuart Haselden may not be a splashy hire, but we're inclined to give the duo of Michael Casey (ex. Starbucks CFO) and David Mussafer (Advent/new to the Board) the benefit of the doubt in the hiring process. This is the first big move for the Board after the coup that led to Chip's replacement as Chairman and the selling of half of his ownership position. We almost never get too upbeat about a single individual in an organization. But we think that this role is an exception.

Why? The Finance function at LULU has always been extremely weak. Currie (ex. CFO) was appropriate to be Chip's numbers guy in the early days of the company, but  CHIP purposely kept the entire function at bay as the company grew up as he thought it would hurt the culture of the company. Translation = one of LULU's biggest problems is that it grew up without having any finance culture whatsoever. It's impressive that it made it this far.

Now you have Haselden who was hired by the Board led by Casey and Mussafer who both know the caliber of person needed to get this company back on track. Our sense is that new CFO will be tasked with rightsizing the company. If Laurent wants to follow, then great. Everyone wins. But if he resists, then the new CEO will soon be the old CEO.

It's odd…in our conversations with investors, people agree that Currie had to go, but don't necessarily think that there's a problem with the finance organization being so weak at LULU. We think that people will only realize how problematic this has been once it is fixed. 


PVH - PVH Corp. Announces Closing of Izod Retail Division



Takeaway: The KSS bulls will argue that this is a net positive for the company who just picked up distribution in the fall of 2014. We'd point to a couple of things. 1) Most, if not all of the locations set to close are outlets. If you're an outlet shopper you don't go to the mall to buy IZOD, you go to the outlet center specifically to find great value in whatever brands happen to be there. Men's Polo shirts are a dime a dozen and so are the places that sell them. 2) IZOD - is not a KSS exclusive. If you go to Izod's website, which we would note doesn't actually sell anything, you'll see its wholesale partners: Kohl's, Macy's, Amazon, JCPenney, Belk, Bonton, Beall's, and Hudson's Bay. All of whom have a longer standing relationship and association with the brand than KSS. 3) Lastly and probably most importantly, PVH isn't closing these stores because consumers really want the brand. The IZ logo doesn't resonate the way the alligator once did and the brand has been diluted down to the point that it's a commodity. In that context, the closing of DTC makes sense as the brand itself can't drive traffic.


FDO - 1Q15 Earnings

Retail Callouts (1/8): DKS LBO, LULU CFO, PVH, FDO, AMZN, EBAY, TGT - 1 8 chart1



AMZN, EBAY - AMZN 2year trend improvement, EBAY negative data point on 1 and 2 year basis


Takeaway:  ChannelAdvisor's total same store sales for the Holiday (November and December) came in at +16.2%.  AMZN outperformed at +26.9% and EBAY underperformed at +7.3%.  The trend for both companies’ fiscal Q4 wasn't as good as the prior 2 quarters.

Retail Callouts (1/8): DKS LBO, LULU CFO, PVH, FDO, AMZN, EBAY, TGT - 1 8 chart2





TGT - Target Links With Lilly Pulitzer



TSCDY - Tesco’s Lewis Sets Out Revival Plan With Closures, Disposals



TSCDY - Tesco Names Halfords’s Davies as U.K. CEO in Turnaround Bid



MAKSF -Marks & Spencer Clothing Sales Drop Amid Online Delays



FAST - Fast Retailing Q1 Net Profit Jumps 64%



WTSL - Bankruptcy Rumblings Surround Wet Seal Closures



BODY - Body Central Said to Prepare for Bankruptcy Within a Week



Bi-Lo CEO to leave


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