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LEISURE LETTER (03/12/2015)

Tickers: RCL, CCL

EVENTS

  • March 16-19: Cruise Shipping Miami Conference
  • March 19: Galaxy FY 2014 results

COMPANY NEWS  

Macau Legend- Macau Legend Development Ltd’s CEO, David Chow Kam Fai, expects the adjustment in Macau’s gaming market to last for two more years. Chow said Macau’s gaming industry has enough money to see it through the slump in business. Chow failed to answer directly when asked if the government was going to give his company its own gaming licence.

ARTICLE HERE

Takeaway: A bearish outlook from David Chow

 

Genting Singapore- repurchased 5.989 million shares totaling US$4 million, bringing its repurchases to more than 11 million shares. Genting Singapore has said it will repurchase up to 1.224 billion of its 12.084 billion shares.

 

RCL  

  • Royal Caribbean's newest ship Harmony of the Seas will spend the start of the 2016 summer season in Europe.
  • Independence of the Seas will return to Southampton in 2016.
  • Also returning to the UK is Navigator of the Seas, having recently been through a £50 million pound makeover as part of Royal Caribbean's fleet-wide refurbishment programme.

ARTICLE HERE

Takeaway: It will be a busy time for the UK in 2016. Will higher supply affect pricing?

 

CCL  - CEO Arnold Donald has admitted the way the company cut commission in the UK in 2011 was executed poorly. But he suggested agents put customer service above earning potential when booking first-time cruisers.

 

Donald said the remuneration cuts to 5% were an “honest attempt” to respond to discounting but he conceded the lines, which include P&O Cruises and Cunard, hadn’t got it right.

 

He said the commission cuts were an attempt to help the trade eradicate discounting but the move had backfired. Now, he added, he was keen to build ties for the future to ensure the success of agents’ businesses and that of the Carnival Corporation brands.

 

ARTICLE HERE

 

 

INDUSTRY NEWS

Beijing-  The Chinese Security Ministry has continued its hardened stance against corruption in Macau, by warning mainland officials and Chinese business leaders that they would be monitored if they visited Macau gambling enterprises.

 

The hardened approach to Macau casino enterprises is part of President Xi Jinping’s wider ongoing effort to curve Chinese corruption through the ‘Tigers & Flies’ special taskforce. Xi Jinping wants officials to lead the fight by shunning away from practices associated with corruption (in particular money laundering) such as gambling,

 

To its financial detriment, Macau has suffered from the Security Ministry’s anti-corruption measures. Asian news sources have reported that the Ministry has the authority to carry background checks on all national gamblers visiting Macau casinos.

ARTICLE HERE

Takeaway: A followup to Li Gang's comments earlier in the week.

 

Las Vegas - Visitors to Las Vegas last year spent an estimated $723 each. Spending per visitor is also up by $33 compared to 2013 with convention-goers spending more than leisure travelers. Jeremy Aguero with Applied Analysis says 2014 represented the highest visitor spending the destination has ever seen on everything but gambling.

ARTICLE HERE

MACRO

China February new yuan loans CNY1.02T vs consensus CNY700B and CNY1.47T in January

  • Loan growth +14.3% y/y vs +13.9% in January
  • Deposits +10.9% y/y vs +13.7% in January
  • Total social financing CNY1.35 vs consensus CNY1.100T and CNY2.05T in January
  • M0 +17.0% y/y vs (17.6%) in January
  • M1 +5.6% y/y vs +10.6% in January
  • M2 +12.5% y/y vs consensus +11.1% and +10.8% in January

Takeaway: A surprisingly positive loan data point. It may alleviate some pressure from the Central government to push for more stimulus. 

 

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.


HIBB – As Good As It Gets

Takeaway: This quarter should be as good as it gets for HIBB. Don’t get used to it.

We think that HIBB is one of the most structurally challenged retailers out there. But we’re definitely not counting on the company showing its true colors with the print this Friday. This quarter is literally as good as it can get for HIBB. 1) Wal-Mart, from which HIBB draws traffic in its core market, just printed the first positive traffic comp in nine quarters. 2) Athletic retailers like Dick’s and Foot Locker both printed solid comps in the last two weeks (DKS +3.4%, and FL +10%). 3) HIBB went against its second-easiest comp in over five years in the month of January. All-in, the comp for 4Q14 will more likely than not come in ahead of the Street’s 3.2% expectation. Somewhere in the mid-single digits is more likely, with EPS closer to the low $0.70s vs. the Street at $0.68.

 

So…what does this mean? It means that HIBB is our least favorite type of call. The kind where we say it’s a short, but where estimates in the upcoming quarter are too low. When we hear someone make that kind of pitch, it usually ends up being a really lousy call.  

 

So how and why can we stick with a short call on a name in the face of a likely positive event?  A few reasons... 

 

1) Smoking Required. HIBB absolutely positively has to smoke this quarter due to factors above (see charts below). Again, the climate has never been more favorable for a retailer like HIBB. The stock is up 10% relative to the market over the past month. If it does NOT smoke numbers, then it spells big trouble for this company.

 

2) e-Commerce Hit Inevitable. It’s no secret the company needs to install an e-commerce platform. It should be very expensive – costing 3-5 points in margin over 12-18 months before a dollar in dot.com revenue is recognized. Will HIBB announce that initiative on Friday? We don’t know. It will be some time this year. They’re just prolonging the inevitable.

 

3) Huge Estimate Gap. The gap in margin between our estimates and the Street’s are simply colossal. This year, we’re 7% below. That’s not huge. But in ’16 we’re at $2.06 vs the Street at $3.33. By the time we get to year 5 of our model, we have HIBB earning $1.35 vs the Street at $4.74.  The point here is that if we’re calling for estimates to come down next year by nearly 40%, we’re hardly going to be spooked by a few pennies on the upside.  

 

WMT Traffic – Key For HIBB Comp – Positive For The First Time In Nine Quarters

HIBB – As Good As It Gets - hibb wmt comp traffic

 

FL Comp Trends Are Off The Chart. Not Identical Businesses, But Close Enough.

HIBB – As Good As It Gets - FL Comp Trend

 

Ditto For DKS – Though Less Positive Than FL. Comp Driven By e-Comm (which HIBB does not have), Brick&Mortar Down

HIBB – As Good As It Gets - dks comp trends

 

HIBB Monthly Comp Trend Shows The This Quarter Goes Against Second Easiest Comp In Over 5-Years

HIBB – As Good As It Gets - hibb monthly comps

 

HIBB – Hedgeye Financial Summary

HIBB – As Good As It Gets - hibbfinancials


SGMS 4Q 2014 CONFERENCE CALL NOTES

CONF CALL

  • 5% of employees (450 positions) eliminated by end of 2014
  • Gaming consolidation underway in Las Vegas
  • Highly confident in seeing improvement in FCF starting in 2H 2015
  • Gaming ops:  Average daily revenue/footprint increased 10% YoY in 2014
  • Lower installed base: One single customer reduced slots by 259 in 4Q 
  • $18.5m not added to Attributable EBITDA -consisting of $6.2 million of impairment charges associated with the Monopoly Millionaires Club™ game (of which $5.7 million impacted cost of instant games and $0.5 impacted depreciation and amortization), $5.2 million of impairment charges related to inventory obsolescence (of which $3.1 million impacted cost of services and $2.1 million impacted cost of sales), $4.0 million write-down of certain receivables from international customers included in selling general and administrative expense and an incremental $3.1 million charge in earnings (loss) from equity investments related to the additional shortfall payment booked by the Northstar Illinois joint venture for the lottery's fiscal year ended June 30, 2014.
  • No significant maturities until 2018.  Paid down $18m in revolver to fund Bally acquisition. 
  • Currently liquidity of $538m
  • FCF: priority is to pay down revolver
  • 2015 Capex: $320-$350m (15-25m integration related capex)
    • Spending mainly on lottery side of business
  • SG&A:  $85m of charges previously described; $11m restructuring expenses ($1m WMS-related)
  • 7% increase revenue in UK installed base
  • 4Q: 228 IL VGT units shipped
  • 4Q replacement: 4,511 (848 units YoY increase)
  • Maintenance revenue virtually flat
  • Table revenue down $1m 
  • Lottery services revenue declined $5m (low performance of Powerball and MegaMillions). 2015 better start due to large Powerball in February.
  • Lottery: benefited from lower OpEx and lower termination expenses  
  • Interactive: $3m from Bally
  •  Key priorities:
    • 1) customers
    • 2) focused on integration initiative
    • 3) discipline in management of deployment of capital

Q & A

  • Feedback from customers: similar budgets as last year
  • Believe increased wallet share in Q4
  • Leverage:  Q4 included $135m of cash-based charges. Continue to invest wisely and get appropriate returns. 
  • 2015 Gaming:  relatively flat with a slight increase in share 
  • 2015 Lottery: Europe doing better
  • Gaming systems:  long lead time. Expect some big sales.  ALH rollout is very exciting - for the smaller-end market.
  • NOL balance at end of 2014: will be in the 10K (will be filed on Monday)
  • Cash taxes:  tens of millions from foreign results
  • Q4 Replacement units:  Bally had a stellar performance with Wave cabinet and Shuffle products. 
  • Gaming ops: customers are used to operating in 'new' environment. Mixture of luck, lower gas prices, and better weather also playing impact.
  • Salesforce integration:  training session. So far, so good.
  • Pro-forma 12mth ended: Cash based interest expense was $615m 
  • In purchase accounting, eliminated deferred revenues that Bally had ($27m). $5m of that $27m would have been in Dec Q. The other $22m will be impacted in 1H 2015.
  • Greece (OPAP):  contract being finalized now. SGMS was selected as a contractor. 
  • Can you get Interactive margins to 30-35%?  Rolling out mobile part of interactive.  Spending more there which has adversely impacted margins. 
  • Area of disappointment:  non-WAP premium units declined in 2014.  Customers had to reduce costs in that sector.  
  • Good performance with Wonder Woman and Flintstones 
  • S23 Cabinet will be launched this year and a couple of more products
  • The $15-25m of integration capex is in addition to the $70-80m disclosed previously
  • Low Gas price impact:  instant ticket sales are up but don't know definitely if there is an impact
  • Attributable EBITDA from Equity investments: $70.8m in FY 2014
  • Writedown in receivables:  related to Gaming business in Latin America

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MACAU: WAY BACK IN 2013

Takeaway: Stocks are down a lot but still at July 2013 levels – a time when estimates were higher, the outlook brighter and risks greater.

CALL TO ACTION

It’s been a year since we made the first call of our three pronged short call and we remain bearish on Macau stocks. Yes, the sell side has caught up and most analysts are bearish. While the stocks have fallen a lot, they have only reached July 2013 levels. We’ve made the bear case in many ways over the past year but the purpose of this note is to show that there is downside precedent. In July of 2013, 2015 Street EBITDA estimates were much higher than they are now and the short, intermediate, and long term growth forecast was much greater.

 

Please see our detailed note: 

http://docs.hedgeye.com/HE_WAY_BACK_IN_2013_3.11.15.pdf


Keith's Macro Notebook 3/11: Euro | Yields | Sentiment

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


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