• run with the bulls

    get your first month

    of hedgeye free



I took the challenge and was not all that impressed, but VIA is a line extension for the brand that makes some sense.


Right about now, a successful new product in Starbucks stores would solidify the turn in fortunes at the company.  Given Starbucks’ massive retail distribution system in the United States it does not take much to move the needle on sales and profitability.   The instant coffee market is a $21 billion category at retail and is dominated by Nescafe and Sanka.  There is definitely room for SBUX to take some market share with a high margin product.  Obviously, the $21 billion in instant coffee sales are through other channels of distribution so the potential opportunity for SBUX beyond its own store base is big.


This past weekend it was media blitz with VIA ads everywhere, and for the first time in the company’s history, these ads were on TV. While it is way too early to call VIA a success or a failure, I was not overwhelmed and the bloggers are mixed on the product.  I am not yet convinced that the typical Starbucks consumer would want to buy instant coffee.  Instead, as I said before, I think VIA’s real potential lies in SBUX’s ability to steal market share from both Nescafe and Sanka in the grocery channel.


That being said, on an annual basis, a 1% improvement in SBUX’s U.S. same-store sales growth represents about $65 million in incremental sales.  For SBUX this means that each store needs to generate less than $30 a day in incremental sales from VIA (implies only about 10 units per day at $2.95) in order for the company to generate 1% in same-store sales on an annual basis.  I believe that the company’s goal is significantly higher than that.  That $30 of sales per day per store would add $0.02 to $0.04 in annualized EPS.  It is important to remember that VIA is a fiscal 2010 event as the product was just launched early in the first quarter of fiscal 2010.  That being said, we look forward to hearing how the product is faring thus far when the company holds its 4Q09 earnings call on November 5.


The table below shows the estimated sales and earnings potential for VIA, but again, we think the company’s targets are higher than what we are assuming.  We know there are millions of instant coffee drinkers in the United States, but the question is can SBUX convince them to drink VIA and will they go to Starbuck’s stores (or the web) to buy VIA. 




"Revenue per available room across our North American system declined less than expected during the third quarter as leisure travelers responded to attractive promotions and great values in our hotels. With solid cost controls, our hotels translated better than expected occupancy rates to stronger than expected fee revenue and earnings."



Outlook for 2010

  • Expect RevPAR to modestly decrease in 2010
    • ADR rates for group and government business will constrain and negatively impact ADR, as will the mix shift towards leisure
    • ADR will also be negatively impacted by supply increases
  • 25-30k new rooms expected to open
  • Applications from franchisees have slowed for their limited service hotels
  • Asia represented 40% of their full service pipeline, and virtually 100% is under construction
  • Think that there is a flight to quality for owners and franchisees
  • Haven't yet seen a pick up in conversions but expect to see a big pick up in 2010 as the number of workouts increases
  • System wide RevPAR flat to -5%
  • New managed hotels in Asia & ME will help incentive fees
  • Assume that international will be better than NA for 2010 (I'm sure the that FX will be part of this)
  • For timeshare, assume flat timeshare development profits and flat contract sales
    • Over 50% of costumers are paying for their timeshares with cash, so they are financing a smaller portion than before
    • Accounting change for FASB will add 5 to 8 cents to EPS in 2010
  • Timeshare expected to generate $75MM of FCF in 2009 and double that in 2010
  • Believe that a large portion of the savings they booked in G&A are permanent
  • 2010 should see large debt reduction
  • 1Q2010 is likely to continue to show meaningful RevPAR declines, driven by rate


Results for the quarter and 4Q09 outlook

  • Better profits were largely due to better RevPAR and cost controls
  • Corporate demand at MAR has been profoundly impacted by the economy
    • Room nights were down 11% compared to an 18% decline (y-o-y) in 2Q09. However some of the improvement is just easier comps
    • Room rates less encouraging.  Everyone wants a special deal.  Corporate room rates declined 19%. Expect them to continue to be weak until occupancy recovers
    • Corporate represent 25% of room nights and group represented 33%
    • Cancellations and attrition were better than 1H09, but last minute bookings in the quarter were very light
    • Occupancies in NY have moved up - a sign that corporates are dipping a toe in the water
  • Leisure accounted for 40% of room nights vs 30% last year
  • Weekend occupancy was 6 points higher than weekday occupancy
  • International
    • ME impacted by early Ramadan
    • European occupancies exceeded 70% despite big ADR drops
  • Domestic RevPAR is roughly at 2004 levels
  • Timeshare helped by customer incentives
    • Seeing stabilization in core 1 week sales
    • US delinquencies increased to 10.8% in Sept, however they were flat at 5.5% excluding loans already in default
    • Because of an improvement in cure rates they were able to get higher residual interest
    • New FASB rules require them to consolidate, debt & asset balances will increase while equity will decline. Revolver covenant calculations won't be impacted nor will the way rating agencies treat non-recourse debt.
    • Will try to monetize excess land in their timeshare division at favorable rates
      • Based on our estimates they have over 7 years of inventory at current sales velocity so selling land makes sense
  • Expect debt to decrease $600-650MM in 2009 with further reductions in 2010
  • Development front: opened 10k rooms and closed 500 rooms
    • Roughly 50% of the rooms in the pipeline are under construction and 7% are awaiting conversion
    • Added 8,000 rooms to the pipeline and cancelled 5,000
  • 4Q09 "outlook" not "guidance"
    • Much of the RevPAR decline will come from ADR and mix shift to lower rated and leisure business
    • Unit expansions will help fees but tougher cost comps will hurt them. 
    • House profit margin declines will be similar to what they experience in the 3Q09
    • Timeshare note sale in the 4Q09, and given the strong securitization market expect to book a $10-15MM gain
    • Expect G&A to decline 20%
  • Look forward to the upturn which they believe is "ever closer"




  • Expenses rising next year at corporate and property level?
    • There were basically slim no increases in 2009 and bonuses were also zero.  In 2010 they will probably need to give employees some wage growth and bonuses.  Healthcare and utility costs should increase slightly as well.
    • Need positive RevPAR to keep margins flat
  • Overwhelmingly their recovery will be levered to corporate and group recovery; ie GDP and economic recovery
  • Hope to cross over the zero line of occupancy hopefully in 1H2010, and at that point they can ease promotions
  • What more can they do at the property line to hold margins?
    • Procurement - managed to improve F&B margins
    • Labor productivity continues to improve
  • Timeshare Strategy change
    • Made a strategic decision concerning pricing especially at the luxury side of the business and at the new prices the NPV of the projects were materially lower, hence the impairment charge
    • Decided to accelerate sales in Europe and sell the remaining land inventory
    • Decided not to develop some land that they bought at the top of the market
    • Got ahead of themselves from an inventory standpoint, so now they are going to "right-size" the inventory to the current sales velocity
      • Most of the replenishment occurred in 2007 because the sales pace grew so much between 2005-2006, normal inventory should be 2-3 years not 7+ years
  • Could they be too conservative?
    • There aren't really any leading indicators for their business
    • Their business is heavily dependant on economic activity
  • One analyst claims that he is seeing stronger rates at hotels... I don't know what he is seeing but I travel very frequently and I'm seeing a tremendous amount of deals.  This week alone I saw
    • Wynn rates for $109
    • All inclusive Mexican resort for $59 per night per person
    • $419 7-night Caribbean cruise on Princess
    • 55% off on Accor hotels in Oct
  • Pay increases?
    • In the 3rd quarter the true run rate SG&A number was really $124MM (excluding $5MM of legal and $15MM deferred comp).  Can't continue to not pay people forever.  So assume SG&A will be up modestly in 2010.
  • Assumption that International will outperform NA in 2010?
    • Part of it is easier comparisons (like H1N1 and political instability in certain markets like Thailand)
    • Since they didn't book a lot of group business in the US for 2010, they need to dig themselves out of that hole in the US, while international has a lower % of group business
  • Cancellation and attrition in group is a less of an issue now than in 1H09, but booking pace is still very weak
  • 2010 will start with a meaningfully bad RevPAR number but will end a lot better... how things progress throughout the year will really determine what the final y-o-y RevPAR change is
  • Room growth:
    • Full service portion of their pipeline is primarily outside of the US. Its very difficult to develop full service in the US unless it's municipally financed or part of a mixed use project. There is no financing available for full service in the US.
    • Headwind in supply in US is in upscale not upper-upscale
  • Transaction volumes have not stepped up so far, but expect them to
    • Banks aren't forcing as many assets into foreclosure
    • They are interested in buying distressed assets for a short term hold and retaining management contracts
  • Timeshare, elaborate
    • In Europe they decided that they have plenty of inventory and it doesn't make sense to develop any more
    • For luxury residential, they are exiting that business -  at least what they develop, not what they license
    • Will continue to do fractionals though
  • FX tailwind?
    • 16-18% RevPAR declines in constant dollars for 4Q09, so they will be impacted by currency. They have some hedges in place too - so the bottom line impact won't be significantly material


Living up to Expectations

Living up To Expectations

October 8, 2009





My big hesitation heading into today was centered around expectations that were seemingly heading out of control. There was no question that September was going to be a good month, but didn’t the Street already know this? Well, the monthly results are now in and it is clear that this month met high expectations with results further supported by several upside earnings revisions. Even the few companies that fell short of expectations, fell short by a very small margin. Overall, a solid beginning to a season of “easy comparisons” as we enter a period in which last year’s results were amongst the worst in decades. The real question is if the consumer is really back in full force and we’re not convinced this is the case. But a slow and gradual recovery is underway and it’s hard to ignore meaningful upside revisions (better sales, tight inventories) that are likely to continue through the end of the year.

  • Upside with positive earnings revisions: ROST, TJX, JCP, TGT, TJX, ARO, AEO, KSS, GYMB, FRED
  • Upside to sales expectations: LTD, PLCE, ANF, HOTT, ZUMZ, M, DDS, BONT, JWN,
  • Downside(essentially in line): GPS, BKE, SKS, BJ, SSI

Living up to Expectations - 1


Living up to Expectations - 2





Some Notable Call Outs


  • Both COST and FDO highlighted the pros and cons of lower employee turnover during this time of high unemployment. In the case of COST, lower turnover is leading to higher healthcare costs, as more employees are meeting the six month minimum time on the payroll required to be eligible for healthcare coverage. In the case of FDO, management believes that with 90% of store managers having had experience with the corporation during holiday ’08, there will be a benefit to customer service and store level execution for this holiday season. Absent any major changes in the job market, lower turnover across the entire retail sector should translate into a better customer experience.


  • For the first time in over a year, Costco reported positive same store sales in both hardlines and softlines categories. Additionally, the Southern California market showed the largest sequential positive delta from reported fiscal 4Q results. Deflation, while still prevalent in the food/sundries categories, has subsided a bit from July and August levels.


  • Last quarter after stressing that retailers were producing more at-once orders and relying less on “futures”, Wolverine World Wide management relayed that the pendulum appears to be swinging back to a more normalized balance. Futures orders at the end of 3Q are tracking down mid single digits, but ramp to being “solidly positive” by for the Spring ’10 season. Additionally, management remains confident that mid to high single digit declines in product costs will be a key contributor to gross margins over the next three quarters.


  • With one store already in LA, look out for the NYC opening of Superdry in November. The UK based chain is making its way to the U.S. and aims to target the Abercrombie, Urban Outfitters, and TopShop demographic. The men’s and women’s apparel has been said to combine a vintage Americana aesthetic crossed with some Japanese influence. If that sounds confusing, then just check out: http://www.superdrystore.com/





Consumers say their holiday budgets are tight, but 85% will shop online - Despite plans to tighten their belts, 85% of consumers plan to shop online and 69% plan to make an online holiday purchase, a new survey from Burst finds. Consumers also anticipate using the Internet to shop around, with 57% of consumers planning to compare different retailers to find the best price and 55% planning to use the web to compare brands’ features, according to the Burst report. The survey also found that more than 27% of consumers who made an online purchase a year ago plan to increase their online spending this year. Nearly 15% will decrease online spending. <internetretailer.com>


Obama to Make Appeal to Voters for Consumer Agency - President Barack Obama plans to appeal to voters for help in moving forward his proposal to create a new agency to oversee consumer financial products, an administration official said. The banking industry has opposed the agency, saying it would stifle consumer choice and limit access to credit. Republicans in Congress also have been critical of the plan. The agency would oversee products such as mortgages and credit cards. Representative Barney Frank, chairman of the House Financial Services Committee, has proposed scaling back Obama’s proposal to exclude retailers, merchants and non- financial businesses. <bloomberg.com>


Adidas Redeems Debt - Adidas AG announces that the company is redeeming the €400 million convertible bond, issued in August 2003 and guaranteed by Adidas AG, pursuant to § 3 (3) of the Terms and Conditions of the Bonds prior to maturity on October 8, 2009, effective November 23, 2009. In accordance with the Terms and Conditions of the Bonds, outstanding bonds will be redeemed on this date at their principal amount plus interest accrued as far as bondholders do not exercise their conversion rights by the end of November 9, 2009. In light of the current Adidas AG share price, the company expects that most or all bondholders will exercise their conversion rights. If all bondholders exercise their conversion rights, this would result in up to 15,684,313 new shares being issued from the company's Contingent Capital 2003/II. <sportsonesource.com>


Nike Names VP of Central and Eastern Europe - Nike, Inc. announced that Michaela (Michi) Stitz has been named as vice president of Central and Eastern Europe (CEE). Stitz will be responsible for driving continued market leadership and growth for the CEE geography, replacing Marc van Pappelendam, who was recently named as VP of the UK/Ireland territory. Having started her Nike career in 1996, Stitz set up the equipment business for Nike Austria, Switzerland, Slovenia and Croatia. In 1998 she became Footwear Business Director, followed with the position of General Manager for Nike Austria, Slovenia and Croatia in 2002. She moved on to become Sales Director for Nike Germany, and then after briefly taking a break to move back to Austria, Stitz returned to Nike 18 months ago as GM of Austria, Germany, Slovenia and Switzerland (AGSS). <sportsonesource.com>


Target Reduces Price on Holiday Toys - Discounts and price cuts have been made on popular licensed holiday toys at Target, including Barbie, G.I. Joe and others. Select toys at Target have been discounted up to 50 percent, including Mattel's Barbie fashion doll for $5, Hasbro's G.I. Joe Tough Troopers figure for $14.99 and Fisher-Price's Little People Play 'N Go Farm 50th anniversary edition play set for $11. A complete listing of the discounted holiday toys can be seen at www.target.com/weeklyad. <licensemag.com>


Fast Retailing Profit May Rise 25% on Uniqlo Sales - Fast Retailing Co., Japan’s biggest clothing retailer, said full-year profit may rise 25% as its +J brand, overseen by German designer Jil Sander, and other new clothing lines boost sales at its Uniqlo chain. Net income may be 62 billion yen ($703 million) for the 12 months ending August 2010 from 49.8 billion yen last year, the company said today. That compares with the 64.6 billion yen average estimate of 18 analysts compiled by Bloomberg. Cashmere short-sleeve sweaters, skinny jeans and other hit products are driving sales even as job losses and wage cuts chill household spending in Japan. <bloomberg.com>


August Outdoor Sales Soft, Upward Movement in Select Categories - Retail sales for all core outdoor stores combined (chain, internet, specialty)* declined 6% compared to last August, moving from $346M to $325M, according to the most recent edition of the Outdoor Industry Association (OIA) Outdoor Topline Report. Select equipment, accessory, outerwear and footwear categories continued positive momentum in August. Year-to-date sales (January - August 2009) totaled $2.9B, down just 5% from the same period a year ago. <sportsonesource.com>


Carrefour Denies Talk of Sale - Carrefour SA, the world’s second largest retailer, has denied it plans to sell its operations in the fast-growing Chinese and Latin American markets. Press reports here said the company was facing pressure from its biggest investors, including luxury titan Bernard Arnault, to exit China and Latin America. Carrefour said its strategy to focus on France and other European countries in the short term, and growth markets like Brazil and China in the long-term, remains unchanged. In the first six months of 2009, Carrefour’s Latin American business reported a sales hike of 18.3 percent, while sales in China rose 6.4 percent. <wwd.com>


Shoppers With Money to Spend Find Less to Buy at Saks, Neiman - Jennifer Prentice spent half of what she usually does when she and a friend shopped at Neiman Marcus Group Inc., Saks Inc. and Nordstrom Inc. stores on a recent business trip to San Francisco. They weren’t cutting back. They just didn’t find much to buy. U.S. luxury chains may stand to lose more sales to shoppers like Prentice as they remain wedded to conservative plans for high-end inventories and are unable to shorten delivery times for designer clothes, shoes and accessories, said Stacey Widlitz, a retail equity analyst at Pali Capital in New York. <bloomberg.com>


PPR SA to Float Africa Unit - French retail-to-luxury group PPR SA plans to spin off its African distribution unit on the Euronext stock exchange in Paris by the end of this year, if market conditions are favorable. PPR, which also owns Gucci and Yves Saint Laurent, said it expects to sell its majority stake in CFAO, which distributes pharmaceuticals and cars mostly in Africa. <wwd.com>


Eddie Bauer to Launch First Ascent on October 12 - Eddie Bauer will launch First Ascent in 183 of its stores across North America on October 12, 2009. First Ascent is Eddie Bauer's new line of expedition-quality mountaineering outerwear, apparel, and gear built by some of the foremost mountain guides, including Peter Whittaker, Ed Viesturs and Dave Hahn. <sportsonesource.com>


Seiko Pursues Luxury Market With Ananta - With the launch of its first global watch collection this fall, Seiko is signaling its intention to pursue the fine men’s watch business in the U.S. Best known for the affordable quartz watches it pioneered 40 years ago, Seiko is shifting gears with Ananta, a group of watches priced between $2,100 and $6,300 that make their U.S. debut this month. That may not be easy in a market where luxury spending has declined and once-robust demand for fine watches has cooled. For the first eight months of this year, domestic receipts for watches priced $1,000 to $10,000 fell 25 percent to $1.08 billion, according to watch research firm LGI Networks. Watches priced below $1,000 dropped 14.4 percent to $849 million for the same period. <wwd.com>





NKE: Alan Graf exercised his right to buy 10,000 shares ($220k).


BGFV: Thomas Schlauch, Senior VP, Buying, sold 13,000 shares ($208k), roughly 37% of total common holdings.


KR: Joseph Grieshaber, Group VP, purchased 500 shares ($9k).


WAG: J.R. Lewis, Senior VP sold 1,300 shares ($52k), nearly 5% of total common holdings.


CMRG: Jesse Choper, Director, exercised his right to buy 15,000 shares ($20k).


PETS: Menderes Akdag, President & CEO sold 10,000 shares ($200k), nearly 3% of total common holdings.


VLCM: Rene Woolcott, Director, sold 20,000 shares ($300k), less than 2% of total common holdings.



The quarter was very messy and riddled with charges as expected. However, it looks like clean EPS came in at $0.15, beating the street and company guidance as well as our $0.14 estimate.   Stronger leisure demand and solid cost controls contributed to the better than expected results. 

  • Base management & franchise fee income of $216MM was $5MM above our estimate and incentive fees of $17MM were $7MM better than our estimate
  • Owned, leased & other gross margin was $12MM compared to our estimate of $7MM.  However, the $12MM included a $6MM transaction cancellation fee which we had not contemplated
  • Net timeshare results of $13MM were in line with our estimate


4Q09 Guidance

Guidance of $0.20 to $0.23 is in line with the Street ($0.215) and at the higher end of our $0.20 number.  New guidance for $0.20-$0.23 compares to last quarter’s guidance for 4Q09 of $0.18 to $0.28 for the year or $0.20-$0.32 if you use MAR’s expected earnings range for 3Q09.

  • Guidance for fee income of $310-$320 is in line with our $316MM estimate
  • Owned, leased & other guidance of $15-20MM compares to our prior estimate of $15MM
  • Timeshare guidance of $15MM includes $10-$15MM of note sale gains, this compares to our clean estimate of $4MM and no note gains.
  • The total capital expenditure budget stayed constant from last quarter’s guidance with a small reallocation away from timeshare


2010 Guidance

  • RevPAR guidance of flat to -5% is in line with our estimate of -2%. Keep in mind that if FX rates stay constant, MAR will have a tailwind from FX benefits reflected in its top line
  • Guidance for fee income of $1,050-$1,110MM is a little stronger than our $1,046MM estimate
  • Timeshare guidance of flat contract sales vs. our estimate of down 5%


Stayed tuned for a more detailed review later this morning.

On Being Early

“We are in the only business where we are wrong everyday on something - yet we still enjoy it.”
This was a quote that we received from a client yesterday and I thought it was great.  We are all in a business where the facts change daily and we need to make decisions to adjust to what we have learned.  There is a high probability we are going to be wrong, but we all work hard to lessen those probabilities.  
I know if I have done my homework and work through all of the probabilities, the first thing I always say is, “I could be early.” In this business, duration is very difficult to solve for.  I would rather be early than late.  Personally, I just don’t like being wrong.   
Yesterday, Keith came down hard on himself for being too early in introducing one of our new 4Q09 themes, the “Bombed Out Buck.” For the past two weeks the US Dollar rallied and the S&P 500 corrected as a result.  So far this week, the US Dollar has burned to a higher-low, keeping the most dominant global macro TREND in place, dollar down - stocks up.  Yesterday, the dollar ended slightly higher and stocks were mixed.   
As we have said in the past, those that have benefited the most from the burning buck are bankers, politicians and debtors, and I’m going to add the US consumer.  Keith has challenged me to think that a “bombed out buck” is good for the consumer, but I’m not there yet.  Based on metrics we see for those that analyze consumer confidence, we live in a time where we calculate the health of the US economy and thus, consumer confidence, by using the price of a stock market.  The 56% move in the S&P 500 since the March 9th low has done wonders for the consumer. Consumers have once again regained some confidence in one of their most important Assets – the 401k.  
Keith may have been early introducing the “bombed out buck” theme, but in global MACRO themes take time to gestate and this theme should not be ignored.  Why?  The crashing of our currency is not going to end well.  The Re‐flating of assets and creating another bubble is bad, not good and an unhealthy means to an end.  In the long run, there is a real possibility that the US Dollar's stature as the world's reserve currency will be dead.  This is BAD!
Helping to find a tactical bottom in the dollar will be the performance of some key commodities.  Yesterday, Gold climbed to a record level for a third day, while oil and copper were higher as the dollar is burning.  It’s a vicious circle we are in now - the dollar is burning, driving commodities higher as inflation fears grow.  As inflation fears grow greater, interest rates rate are headed higher which means the buck is bottoming.
The bigger issue we need to consider with the “bottomed out buck” is the politicians in Washington.  The “I-Believe-in-Strong-Dollar Turns Relic as China Begs Stability” story on Bloomberg today does not instill any confidence at all.  The Obama administration has no creditability in the currency markets when talking about a “strong dollar” policy.
In 2009, the most dominant theme in global MACRO has been the “burning buck.”  We are now working on setting the stage for the next chapter of the US dollar – “the bottomed out buck.”   
Early or not, it’s a factor that cannot be ignored.
Howard Penney
Managing Director

EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

XLV – SPDR Healthcare
We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


We shorted oil on 9/30. The three Fed Heads put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY – iShares 1-3 Year Treasury Bonds
 If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Wynn Macau will begin trading in Hong Kong tonight and it should be a successful first day. Thanks to some pretty in depth disclosure, we were able to build out a very detailed model. The model is available to clients upon request.



As expected, Wynn Macau’s IPO was a big success, as much as 10x oversubscribed according to numerous articles.   The stock begins trading on the Hong Kong stock exchange tonight.  According to our quick math, Wynn Macau looked attractive even at the top end of the pricing range (see: “WYNN MACAU IPO: CHEAPER THAN IT LOOKS” published on 9/29/09).  Now that we’ve had some time to pour through the offering circular, we thought that we would share some further thoughts with you.


Our thoughts are broken into two sections:  Projections and Fun Facts (for the other model geeks out there). 





While our revenue model didn’t change, Wynn Macau provided loads of details on their cost structure, most of which we incorporated into our EBITDA calculation.  Our new EBITDA estimates are net of royalty fees and corporate allocations and take into account the new commission caps.  We assume the annual caps provided on page 127 of the preliminary circular for our corporate allocation calculations.   We also assume that Wynn will pay an “all-in” junket commission rate of 41% (vs. the maximum of 44%).  


WYNN MACAU IPO  - wynn macau earnings projections


Based on our estimates, Wynn Macau priced at 16x 2010E EBITDA and 15x 2011E EBITDA, which we believe is equivalent to an 11x and 10x tax adjusted multiple. Once Encore is complete, WYNN Macau should generate FCF in the range of HK $3.5BN and have zero net debt by the end of 2011.  





As we already mentioned, Wynn Macau’s circular provides a plethora of detail on the business and the cost structure in particular.  Below is some supplemental information that we found interesting.


Promotional expenses:

Unlike in the US, Wynn Macau’s revenues are already net of promotional expenses and discounts.  This means that rooms, food & beverage and retail & other revenues do not include the retail value of complementary rooms provided to junket operators.  Since opening, the percentage of rooms and food & beverage allocated to “comps” has steadily increased.  For 1H09, 74% of the retail value of rooms and 66% of the retail value of food and beverage operations were “comped.”  Retail & other is almost exclusively a cash business.   For the purposes of junket commission calculations, rooms will be discounted by 40% and food & beverage will be discounted 30% from retail values.


WYNN MACAU IPO  - wynn macau promotional expenses



Gaming premiums:

In addition to paying 39% of gross gaming win to the government of Macau, concession holders also pay fixed and variable gaming premiums based on the number of VIP / Mass tables and slots that a facility has.  Wynn Macau pays a fixed annual premium of HK$29.1MM plus an annual charge of HK$291k per VIP table, HK$146k per Mass tables, and HK$971 per slot machine.


WYNN MACAU IPO  - wynn macau gaming taxes and premiums



Junket commissions:

In the breakout of “Other Operating Expenses” in the appendix of the circular one can find junket commissions broken out. However, at first glance the number seems extremely low (roughly 0.2% of rolling chip).  This is because “Casino Revenues” are already net of the portion of the junket commission that is a rebate to customers. To calculate the all-in commission rate that we all refer to, you need to include the rebate as well as the discounted value of “comped” rooms and food & beverage.  We estimate that in 1H09 WYNN Macau paid an equivalent rate of 1.29% to junkets or 41.5% of gross win.



WYNN MACAU IPO  - wynn macau junket commissions


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