LEISURE LETTER (01/28/2015)




  • Jan 28:
    • Hedgeye Cruise Call with Mike Driscoll (11am)
    • LVS 4Q CC at 4:30pm
      • , Passcode: 61558874
  • Jan 29:  
    • PENN 4Q CC
    • RCL 4Q CC
  • Feb 2: Cod Manila Grand Opening
  • Feb 3:  GLPI 4Q CC

headline story

IGT FQ1 earnings:

  • Revenue $450.6M vs Street $489.7M
    • First quarter results included an extra week due to the Company's 52/53-week fiscal year, where fiscal 2015 will contain 53 weeks versus the normal 52 weeks in fiscal 2014. Therefore the current year quarter was 14 weeks in length from September 28, 2014 to January 3, 2015, as compared to 13 weeks in the prior year quarter.
    • The extra week of operations during the quarter contributed approximately $22 million in revenue and $2 million in operating income.
  • Adj EPS: $0.19 vs Street $0.25
  • Gaming ops
    • Yield up 3% YoY to $46.36
    • Installed base declined 16% to 45.4
      • Driven largely by declines in International, primarily due to lease operation unit conversions in the prior year, and declines in North America MegaJackpots® ("MJP"), most significantly in the standalone category.
  • Product Sales
    • Revs dropped 39% YoY
      • Primarily due to lower machine unit volume, as the prior year quarter benefited from 2,800 video poker units under a large contract and 825 additional Illinois VLT units.
    • ASP gained 5% to $13,900
  • Interactive
    • Revs increased 23% YoY to $79 million, driven by increases in both average DAU and bookings per DAU. 
      • Average DAU were 1.9 million (+11% YoY), due to improved content and enhanced player retention and engagement strategies.
      • Average MAU were 5.2 million (-16% YoY) primarily due to increased marketing efforts to procure higher-quality players.
      • Average bookings per DAU in the first quarter were $0.43, an increase of 2% over the same quarter last year.
    • Mobile revenue comprised 39% of total bookings in the first quarter and increased 68% compared to the prior year period.

Takeaway:  IGT printed an awful FQ1 2015 #, driven by much lower product sales and major shrinkage in its installed base.  Did IGT lose NA ship share again?  On a trailing 4Q basis (ending 3Q 2014), we estimate IGT's NA ship share was only 33%.  Social gaming was a mixed picture as a higher DAU count offset slower bookings/DAU.




IGT - won the replacement bid to install its Advantage 9.1 System with Media Manager and Service Window at Snoqualmie Casino. The comprehensive systems solution includes IGT's Point Play and Xtra Credit bonusing applications, Media Manager, and IGT's Service Window, connecting 1700 slot machines floor-wide. 


Sun City – raises employee pay by 7% despite gaming slump.

Article HERE

Takeaway:  Wage pressures remain despite lower revenues. We're hearing some employees were still not happy with a 7% raise.


CCL – Costa Cruises North America is turning March Madness into 'March Medness' with offers on spring Mediterranean cruises. Fares start as low as $499 per person, and up to $400 in on-board credits per cabin are available, along with reduced rates for third and fourth guests in a room. The offers apply to seven-night cruises aboard Costa Fascinosa and the new Costa Diadema.

'Reduced rates and high on-board credit offers make the Mediterranean the best deal available this spring,' said Scott Knutson, VP Sales and Marketing for Costa Cruises North America. 'Throw in the current affordability of international airfare and how strong the dollar is against the euro, and Americans have a chance to get more bang for their buck than ever before on a Costa cruise.'

Takeaway:  With the tremendous affordability of a European trip, why is Costa offering pricing/onboard promotions?

industry news

Macau - Macau’s largest labor group is launching a campaign to press the government to implement a full smoking ban in the casino industry. The influential Macau Federation of Trade Unions will start collecting signatures to petition the government to ban smoking from VIP rooms and end smoking lounges on mass casino floors. Under rule changes enacted on October 6 by the Macau government, smoking on casino main floors is now only allowed in enclosed smoking lounges that do not contain any gaming tables or slot machines.

Article HERE

Takeaway:   A full ban on casino smoking is a real risk

Macau Gaming Revenue - Secretary for Economics and Finance Lionel Leong said local casinos’ revenue could drop to somewhere between 23 billion patacas a month, the lowest figure in the last seven months, and 28 billion patacas, the highest, in the first six months of the year.
He also said he hoped there would be “adjustments” during the Chinese New Year holiday period and the mainland’s Golden Week holidays in May and October, adding he remained optimistic about Macau’s economy in the long run.

Article HERE

Takeaway:   Using a midpoint of MOP25.5 bn for the 1st 6 months of 2015 would suggest -21% YoY in 1H 2015 GGR vs 1H 2014 GGR.  If we use the $25.5bn for the entire year of 2015, this results in -13% YoY for 2015 GGR.


S. Korea - A provincial government in South Korea says it too wants to attract foreign investors to build a foreign players-only casino resort.  North Jeolla province on the country’s southwest coast comes less than two weeks after the central government said it would consider bids for two new foreign-players only casino projects in the country – each with a minimum investment of KRW1 trillion (US$925 million). The neighboring city of Gunsan has an international airport of its own that currently provides direct flights to Jeju, a Korean island popular with Chinese holidaymakers and that also has casinos.

Article HERE

Takeaway:  More interest in Korea recently.  Could benefit from junkets moving Macau business overseas.


Nevada - Nevada’s unemployment rate fell to 6.8% in December, the lowest since June 2008. Additionally, according to Case-Shiller.

Takeaway:  Macro has looked better in Vegas.  Locals revenue is up slightly YoY on a trailing 3-mth basis.


Singapore cruising - Singaporeans comprise anything from between 40-60% of passengers onboard international cruise lines sailing out of the island republic, according to the Singapore Tourism Board.  Annie Chang, STB’s deputy director said Christmas and the Chinese Lunar New Year sailings on Royal Caribbean International’s Mariner of the Seas out of Singapore were well subscribed. ‘Cruises are increasingly gaining traction,’ says Chang.


A Singapore's National Association of Travel Agents (NATAS) spokesperson told Seatrade Insider that popular destinations are mostly regional. Malaysia and Thailand have the biggest appeal, with ports of call like Redang, Tioman, Penang, Langkawi, Malacca, Kuala Lumpur, Port Klang, Phuket and Bangkok, according to NATAS. Other regional destinations that are popular include Vietnam and China. Interest in fly cruising is showing healthy growth, says NATAS with particular interest in cruising in Alaska, Hawaii, the Mediterranean, Europe and Japan, the spokesperson added.

Article HERE


Monetary Authority of Singapore (MAS) lowers slope of $-SGD policy band.

Article HERE

Takeaway:  This surprise move by the MAS will result in a slower appreciation for the SGD.  The lower SGD has already been a currency headwind for MBS/Genting.


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.

Daily Trading Ranges, Refreshed [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published January 28, 2015 at 07:28. Click here to learn more and subscribe.

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RETAIL CALLOUTS (1/28): AMZN Free Shipping, Port Dispute Progess, WAG, H&M

Takeaway: AMZN increases qualifying free shipping items, basket size matters for the rest. Parties at bargaining table on w. coast port issues.


RETAIL CALLOUTS (1/28): AMZN Free Shipping, Port Dispute Progess, WAG, H&M - 1 28 chart2





AMZN - Amazon triples number of ‘free shipping’ items



Takeaway: Despite what the headline suggests - this effects AMZN shoppers more than the industry. The free shipping threshold for non-Prime users is still $35, but now items purchased from 3rd party fulfillment can qualify to reach that hurdle.

  1. It seems like a logistical nightmare to have to coordinate corresponding orders from different sellers into one system. So kudos to AMZN for having the logistical capabilities to support that.
  2. It's all about basket size. We looked at the math for 4 different retailers to get a sense of the dilutive effect of free shipping (table below). Because of the differences in basket size JWN gets up 1,500bp higher gross margin than KSS on a straight on-line sale.
  3. No way this isn't a margin killer. Now instead of shipping one box full of items for a $35 order - AMZN (or maybe the 3rd party sellers) are left holding the bag for multiple packages shipped from a non-centralized group of sellers.

RETAIL CALLOUTS (1/28): AMZN Free Shipping, Port Dispute Progess, WAG, H&M - 1 28 chart1


Employers: Agreement made on key issue in port labor dispute



Takeaway: A port shutdown would have been a  catastrophe for a few dozen industries, as well as the balance of US/Asia trade if the West Coast Ports shut down. But that's exactly why they will not shut down. The key bargaining chip -- the Holiday season -- passed without any major hiccups so its not a big surprise to see the two sides sitting at the bargaining table.


Keep in mind that Nike is on the verge of rolling out broader footwear production for FlyKnit product (non-labor intensive) in the US, and closer to the point of sale in other developed markets.  We can only think that problems with product delivery at the ports only hastened Nike's plan to diversify its manufacturing base.





WAG - Walgreens Boots Alliance Appoints George Fairweather as Global Chief Financial Officer



BABA - China Accuses Alibaba of Failing to Curb Fakes, Bribes



AMZN - Amazon to collect sales tax from almost three-quarters of US consumers



H&M - Fashion retailer H&M plans 400 new stores this year



SWY - FTC clears Albertsons, Safeway merger



CHART OF THE DAY: Deflationary Spiral?

CHART OF THE DAY: Deflationary Spiral? - 01.28.15 chart

Editor's note: This is a brief excerpt from today's Morning Newsletter which was written by Hedgeye Director of Research Daryl Jones.


The second reason we believe that the Fed will ultimately be more dovish than consensus expects is deflation.  As is highlighted in the Chart of the Day, which shows PCE and PCE ex-energy and food going back a decade, inflation is solidly below the Fed’s target of 2%.  The charts also shows, of course, that deflation is far from transitory so far with PCE and PCE ex-energy and food tracking very closely.

Bert and Earnings

“The media's the most powerful entity on earth. They have the power to make the innocent guilty and to make the guilty innocent, and that's power. Because they control the minds of the masses.” -Malcolm X

Since starting Hedgeye, we have had two main strategic goals in mind. The first was to reinvent how Wall Street produces, packages and sells research. On this goal, we've succeeded in spades thanks to all of you. 


The second goal was perhaps more bold, and has taken more time and planning, but it was to go head-to-head with the traditional financial media outlets and take mind share. 


We were early on social media and now have a prolific presence. We hired a cartoonist, which was surprising to some, but has been a great way to communicate ideas and themes. (Case in point is the cartoon below highlighting the less-than-stellar start of earnings season.). Finally, we built out a state-of-the-art TV studio in our office in Stamford. 


As it relates to TV, today we are hosting our first full day of interactive programming. We are calling it the Hedgeye Market Marathon and we'll be broadcasting it live from the stock market open to the close:  real players, real analysis, and all in real-time. If you'd like to watch or ask Keith, our analysts or guests a question today, you can sign up here: 

Bert and Earnings - earnings cartoon 01.27.2015


Back to the Global Macro Grind...


Other than watching Hedgeye TV, most stock market operators will be taking a break from earnings season to watch the Federal Reserve this afternoon.  The consensus view of the manic media, and frankly a fair bit of the buy side, continues to be that it is not if, but when as it relates to the Federal Reserve reversing policy and beginning to raise interest rates.


For most 2014, as many of you know, we were of the view that rates were going down and not up.  That was a stance that led to some real out performance for those that implemented it into their portfolios. We continue to believe that this is the right stance and that, if anything, the surprise from the Fed over the next few months and quarters is that they will be surprisingly more dovish than consensus expects.


There are two key reasons for that stance from our perspective.  The first is that we think growth will slow incrementally in the U.S. On Friday, we will get the preliminary Q4 2014 GDP print, which will, we believe, show a sequential slowdown from the +2.7% year-over-year growth rate in Q3.


The key reasons we believe Q4 will slow from Q3 are as follows:


1)    Comps – As you know, we model economies like companies and Q4 has the toughest comparison on a 1, 2 and 3-year basis of any quarter in the last seven years


2)    High Frequency Data – The majority of high frequency data we track has slowed sequentially. In particular, PMI has slowed from 59.8 in Q3 2014 to 55.6 in Q4 2014.  As my colleague Darius Dale recently highlighted, the three-month moving average in economy-weighted composite PMI has a r² of 0.83 to YoY GDP, so is highlight correlated


3)    Yields – The last, and perhaps most obvious, signal of slowing sequential growth is 10-year yields.  Frankly, if they aren’t indicating a growth slow down, then what are they indicating?


The second reason we believe that the Fed will ultimately be more dovish than consensus expects is deflation.  As is highlighted in the Chart of the Day, which shows PCE and PCE ex-energy and food going back a decade, inflation is solidly below the Fed’s target of 2%.  The charts also shows, of course, that deflation is far from transitory so far with PCE and PCE ex-energy and food tracking very closely.


Certainly, we don’t expect the Fed to be ahead of the curve on seeing the challenges of growth and deflation, so there is potential that we have a “hawkish” head fake, but nonetheless we continue to believe the path is to easier policy and not tighter.


Another important point to highlight this morning is the other derivative impact of deflation, which is a negative headwind to corporate earnings in the short run.  On a basic level, it is hard to take pricing power when prices are declining.  More acutely, as it relates to the SP500 and the near term, it will be difficult to have much aggregate year-over-year earnings growth for the SP500 with oil down more than 50% year-over-year.


This earnings impact is not just on energy related companies (although roughly 35% of SP500 earnings can be tied back to commodities).  In fact, in our real-time alerts product yesterday, we actually shorted Keith’s former employer the Carlyle Group ($CG) on the back of the derivative impact from oil.  According to Bloomberg estimates, the big three private equity firms' earnings are looking as follows:

  • Carlyle’s expected to lead the decline with a 73% drop, “driven by its energy holdings”
  • Apollo is expected to report a 63% drop in earnings. 
  • Blackstone Group LP (BX) is expected to have a 32% slide.

In particular, Carlyle’s biggest energy holdings were Sandridge (-58% in Q4) and Pattern Energy (-20% in Q4) . . . Yikes !


We hope you can join us for at least part of our market marathon today.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.85%


Nikkei 17,311-17835

VIX 16.03-23.04
USD 93.65-95.80

Oil (WTI) 44.02-46.81
Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Bert and Earnings - 01.28.15 chart

YELP: Thoughts into the Print (4Q14)

Takeaway: We're expecting a light 2015 guidance release given lofty consensus estimates. Note that our short thesis extends well beyond 2015.


  1. CONSENSUS 2015 ESTIMATES BEYOND LOFTY: Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 consensus estimates, which will require both accelerating new account growth and record low attrition.
  2. EXPECTING LIGHT GUIDANCE, BUT: We’re expecting revenue growth of 32% under our bull case scenario (vs. consensus of 43%).  However, there are a few risks to being short the guidance release, but not enough to consider covering ahead of the print.
  3. IT’S MORE THAN JUST 2015: The problem with YELP’s business model is that its current account base is always the hurdle.  The more accounts it starts the year, the more accounts it will lose, and the more new accounts it must sign to generate growth.  We’re are already seeing signs that it’s model is failing, likely because its TAM isn’t large enough to support it. 



Consensus estimates for 2015 remain outside the realm of reason.  Their mistake is simple: If you don’t understand the attrition element to the story, you can’t understand the excessive number of new accounts required to hit 2015 estimates. 


In the table below, we created a scenario analysis flexing new account growth and average quarterly attrition for 2015.  For perspective, in 2014 YTD, YELP has achieved average new account growth of 40%, which was partially inflated by both the Qype account transition in 4Q13 and the reclassification of SeatMe accounts into Active Local Business Accounts beginning 2014.  YELP's average quarterly attrition in 2014 YTD was 18.5%.  


That said, YELP will need to produce both accelerating new account growth and historically low attrition rates to hit 2015 consensus estimates, which are calling for 43% revenue growth.


YELP: Thoughts into the Print (4Q14) - YELP   2015 Consensus Scenario Detail 3



For 2015, we’re expecting revenue growth of 32% under our bull case, 23% under our bear case (vs. consensus of 43%).  We’re expecting guidance to come in light; especially since management had to essentially cut 2014 revenue guidance last quarter after factoring in the 3Q14 top-line beat.  However, there are a couple risks to being short the release.


The first is the two international acquisitions announced less than a week after its 3Q14 release.  YELP didn’t provide any financial detail on these acquisitions, so we’re not sure how much upside they might provide.


The second is the precipitous decline in commodity costs, which we have loosely linked to YELP’s attrition rate (although that relationship appears to have broken off this past quarter).  This is more of a callout than a legitimate concern.


YELP: Thoughts into the Print (4Q14) - YELP   CRB vs. Att Rate 3Q14


The problem with YELP’s business model is that its current account base is always its hurdle.  YELP’s business model is predicated on hiring enough new sales reps to drive the new account growth necessary to compensate for its rampant attrition.  Since 1Q12, quarterly churn has averaged 18.8%, with a relatively tight standard deviation of 60bps. 


YELP: Thoughts into the Print (4Q14) - YELP   Attrition Rate 3Q14


That said, the more accounts YELP starts the year, the more accounts it will lose, and the more brand new accounts it must sign in the following year to generate its growth.  This strategy would be sustainable if YELP’s TAM was as large as management believed.  It’s not; we delve into its TAM in great detail in the note below.


YELP: Debating TAM

06/30/14 01:10 PM EDT

[click here]


More importantly, we are already starting to see signs that its model is failing.  YELP is now at the point where it can’t produce new account growth in excess of the rate that it is hiring sales reps, which may be the most glaring sign that its model is broken.    


YELP: Thoughts into the Print (4Q14) - YELP   Reps vs. New Acct 3Q14



Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%