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TODAY AT 11AM ET: HEDGEYE MACAU MONTHLY UPDATE CONFERENCE CALL

The Hedgeye Gaming, Lodging, and Leisure team will host a conference call Friday, April 10th at 11:00AM ET to discuss the latest Macau data and our overall thoughts on the market and the stocks.   

 

 

RELEVANT TICKERS INCLUDE:

LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.

 

 

DISCUSSION POINTS

  • The company and market details behind March's 39% GGR decline
  • Summary of our late March Macau trip
  • The true Mass/VIP split is masked by smoking ban related reclassifications of tables - we'll get you the right numbers
  • In terms of YoY declines, the worst could be behind us - but does that mean sequential trends are improving?
  • Revised 2015 monthly market projections
  • Hedgeye company EBITDA estimates vs the Street (LVS, WYNN, MGM, MPEL, and Galaxy Entertainment) - Still below the Street?
  • Research Topic: Why we're a little more positive on Direct VIP

 

CALL DETAILS

Attendance on this call is limited. Please note if you are not a current subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this call. Ping for more information.


MCD: Boom, Like That

“If you’re not a risk taker, you should get the hell out of business.”

– Ray Kroc

 

There has never been a time in the history of McDonald’s where following advice of its legendary founder has been more critical than it is today.  Importantly, if anyone within the organization knows what Ray Kroc meant by this, it’s the 84-year old Non-Executive Chairman, Andrew J. McKenna.  The company has made it clear that Mr. McKenna told Mr. Easterbrook he has the mandate of the board to fix McDonald’s at all costs.  Only time will tell how big and how deep the changes will be.

 

While McDonald’s restructuring plan will be a significant event for the company, it will also have significant implications for the industry.

 

Since the announcement of the new CEO, the news flow on MCD has been confusing and has supported our short thesis.  Sometime between now and the beginning of the summer, MCD will announce a comprehensive strategic turnaround plan.  We don’t want to be SHORT going into the announcement.

 

Below we offer up our opinion on rumors that are flying around as to what might happen at MCD.

 

Shrink to Grow

The number one priority is clearly to reset the sales trends in key markets.  Returning these markets to positive same-store sales growth will result in the greatest creation of shareholder value.  We will wait and see what the company plans to do, but the overarching theme here is that MCD must focus on the mantra “shrink to grow.”  The company must make a concerted effort to shrink the menu, which will likely call for the elimination of the most expensive mistake in the history of the company: espresso based beverages.  It’s time for McDonald’s to focus on being itself instead of pretending to be something it is not.

 

Financial Engineering

The street seems obsessed with the notion that the company will enhance shareholder value by leveraging its balance sheet or forming a REIT.  Taking on additional leverage while margins are declining will put unnecessary pressure on profitability and will perpetuate unnecessary financial risk.

 

G&A Rationalization

This will be the biggest challenge for the new CEO.  It will be critical for Mr. Easterbrook to make bold changes in inefficient and unnecessary operational areas.  While some of the cuts will fall to the bottom line, the company must better maximize its resource allocation (human capital and financial resources) and re-invest in the business to bring the company back to life. 

 

Addressing Franchise Concerns

The new CEO must reestablish the company’s connection with its owner/operators.  For the first 20 years of McDonald’s (under Ray Kroc), there was no franchisee advisory group since franchisees could directly speak to Mr. Kroc about anything.  In the 1970’s, as the corporate bureaucracy started to grow, the franchisees were left to the devise of various corporate regional managers.   At that time, franchisees felt the need to form the first McDonald’s Operator Association (MOA).  Senior management (Ray Kroc and Fred Turner) resisted this idea of an independent group and instead formed a panel sponsored by the corporation called the NOAB (National Operator Advisory Board).  During the rapid growth years, the NOAB essentially functioned as designed, until the first major McDonald’s restructuring/downsizing under CEO Jack Greenberg.  At this time, the NOAB was renamed the NLC (National Leadership Council) and was significantly reduced in size and scope.  Since the Jack Greenberg days, the perception of its “elected” franchisee members have been those closely aligned to the company and did not truly represent franchisee interests.

 

Given the changing dynamics of the advertising marketplace, the critical issue facing the new CEO is how to make OPNAD more effective.  OPNAD is a voluntary U.S. cooperative of McDonald’s owner/operators known as the Operator’s National Advertising Fund.  McDonald’s and the owner/operators combine their marketing dollars to fund national television advertising.  Given that OPNAD was formed in 1967 and the inefficient use of advertising dollars, the question is should the company restructure similarly to how the company purchases media?  For many years, every store paid 1% of sales into OPNAD plus another 2-3% locally.  This went to 2% in the early 1990’s and to around 1.6% today.  With a more regional approach to marketing, that probably needs to come down and the franchisees are talking about bringing some money home to spend locally.

 

Innovation, Innovation, Innovation

Over the past five to seven years, the company has lost its tolerance for risk.  They must become more innovative with every aspect of the enterprise.

 

Create Your Taste

Innovation has its limits – McDonald’s needs to stop the madness.

 

Mobile Ordering

Mobile ordering – which is very advanced in the restaurant space – is a great example of how slow the company is to innovate and change.  It’s appalling to see how far behind McDonald’s is.  This is a real black eye for the company and especially the Board of Directors.  The company recently said a global app should be ready to launch in the next few months, though the launch date and exact functionality of the application will be the decisions of McDonald’s management in each country.  The app will likely rollout in the U.S. sometime this summer.  The lack of technological innovation is just one of many areas that can be tied directly to failure at the board level to drive shareholder value.

 

We look forward to seeing what the new MCD will look like.  But until then, the stock will tread water.

 

MCD: Boom, Like That - 999


Cartoon of the Day: The Occasional Bounce

Cartoon of the Day: The Occasional Bounce - Oil cartoon 04.09.2014a

 

Despite a recent uptick, oil prices are still down around 50% from June of last year. We still don’t like it. 


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Casual Dining Continues to Cool

Knapp released his casual dining same-restaurant sales estimates for March comparable sales and traffic growth.  Importantly, Knapp noted that the accounting results for March 2015 will likely be lower than the weekly estimates due to a shift in timing that would include the last week of February 2015 – a period that had lower comparable sales than the last week of March 2015.

 

Knapp Sequential Moves

March estimated Knapp Track same-restaurant sales growth came in at +0.8%.  If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of -55 bps.  This would mark the fourth month out of the last five in which this metric has decelerated.

 

March estimated Knapp Track same-restaurant traffic growth came in at -1.9%.  If the accounting period number is unchanged from the estimate, that will imply a sequential change in the two-year average trend of -5 bps.  This would also mark the fourth month, out of the last five, in which this metric has decelerated.

 

Casual Dining Underperformance

Casual dining stocks, in aggregate, continue to slightly underperform the XLY Index.  It is interesting to note that this underperformance has intensified over the past week, suggesting that casual dining stocks are really beginning to cool off as sales and traffic trends decelerate.

 

Casual Dining Continues to Cool - 1


Retail Callouts (4/9): RH, BBBY, KSS, JCP, M, PIR, WBA

Takeaway: BBBY joins WMT, TGT, TJX, MCD in raising wages. PIR - e-comm costs, case study for building a direct business.

COMPANY HIGHLIGHTS

 

RH - To see our note RH - Why NSP is NOT and Issue CLICK HERE

 

Keep An Eye On 2H Wages (KSS, JCP, M, etc…)

BBBY: Bed, Bath & Beyond Guiding 2015 Increase in Compensation

(http://phx.corporate-ir.net/phoenix.zhtml?c=97860&p=irol-newsArticle&ID=2033289)

 

Takeaway: The weak comp and revenue guide were not a shocker – as concern over top line trends is what caused us to pull the name off our long bench in January. But the bigger call out for us is that BBBY is jumping on the bandwagon of higher wages. That’s WMT, TGT, TJX, MCD, and now BBBY. Right now this is an issue that nobody cares about. And why should they when we’ve got an environment that’s good enough for the likes of weaklings like KSS, JCP, BELK and BONT to comp in the mid-single digits. But, this is the time of year when demand for employees is at its lowest.  Come late summer as retailers start to prep for back-to-school and then again for holiday, we think companies like KSS, JCP, M, will be in for a rude awakening if the risk management process doesn't start now.

 

Our analysis shows that KSS is at most risk with the highest potential impact to EPS, and the lowest compensation rate according to glassdoor. 

 

Retail Callouts (4/9): RH, BBBY, KSS, JCP, M, PIR, WBA - 4 9 2015 chart2

Retail Callouts (4/9): RH, BBBY, KSS, JCP, M, PIR, WBA - 4 9 chart1

 

 

PIR - 4Q14 Earnings

 

Takeaway: We continue to see a stark bifurcation in the home furnishings space between the established order (PIR, ETH, BBBY, and to some extent WSM) and RH. We never agreed with the compare between PIR and RH and that extrapolation seems to be a thing of the past. But we think it's important to draw a distinction between a retailer with 1074 units selling middle of the pack decorative items and RH who operates in around 70 markets and is doing to the home furnishings space what Ralph Lauren did to apparel in the 80's.

 

That being said, expectations were extremely low following the guidance snafu and the ouster of the company's CFO in February. E-comm popped from 4% of sales LY to 11% in the most recent quarter and margins took a beating as a result -- down 200bps. Some of that is due to investment, but we have to think that shipping is a big headwind facing this company, even though PIR doesn't currently offer free shipping no matter how much the consumer spends.   The margin implications are even worse as they try to compete for market share online with Amazon (generally Free Shipping) and Wayfair ($49 threshold).  That's a good case study for other retailers in the space who are attempting to grow this channel. Particularly HIBB, who is one of the only retailers left in retail without an e-commerce presence.

 Retail Callouts (4/9): RH, BBBY, KSS, JCP, M, PIR, WBA - 4 9 chart3

 

 

OTHER NEWS

 

WBA - 2Q15 Earnings

Retail Callouts (4/9): RH, BBBY, KSS, JCP, M, PIR, WBA - 4 9 chart4

 

KORS - Michael Kors launches Canadian e-commerce website

(http://www.newswire.ca/en/story/1514403/michael-kors-launches-canadian-e-commerce-website)

 

BRIEF-Interparfums and Coach sign global license agreement

(http://www.reuters.com/article/2015/04/09/idUSFWN0X600M20150409)

 

WMT - Walmart wage hikes under way in many states

(http://www.retailingtoday.com/article/walmart-wage-hikes-under-way-many-states)

 

NKE, ICON - Fila and Iconix Settle With Converse

(http://wwd.com/business-news/legal/fila-and-iconix-settle-with-converse-10109342/)

 

LVMH - Louis Vuitton Opens New Miami Store

(http://wwd.com/retail-news/specialty-stores/louis-vuitton-opens-new-miami-store-10109362/)

 

Authentic Brands Group Introduces Mini Marilyn

(http://wwd.com/retail-news/marketing/authentic-brands-group-introduces-mini-marilyn-10109393/>

 

Hudson’s Bay Shareholders Set Secondary Offer

(http://wwd.com/retail-news/financial/hudsons-bay-shareholders-set-secondary-offer-10109468/)

 

 

 

 

 

 

 


RH - Why NSP is NOT An Issue

Takeaway: Punchline = if you’re worried about RH New Store Productivity, don’t be.

We’ve had a barrage of questions over the past 24 hours about Restoration Hardware’s new store productivity – or lack thereof. First off… there is absolutely positively nothing ‘funny’ going on here as it relates to asset productivity. Unlike an apparel retailer that adds four stores per week, RH is adding four this year. It is a different animal altogether, one where the timing of an opening date, revenue recognition, and whether or not a Legacy store is closed all meaningfully impact what people consider ‘New Store Productivity’. Second, this is absolutely positively nothing new. There have been anomalous factors impacting the reported numbers for nine months now. Someone simply decided to write a report yesterday highlighting it 2 weeks after the earnings report.

 

Also, let’s not forget the big picture here. This company just finished a seven-year period where it consistently shrunk its square footage footprint every year, and just started off an inverse period where it will grow square footage by 20-30% annually over another 5-7 years. Given its limited store count, unique customer ordering profile, and radical change in the box size, it’s a near certainty that there will be major swings in ‘new store productivity’.  The good news is that what has hurt RH for the past nine months should start to go the other way later this year.

 

There are 3 factors impacting the numbers, which are as follows:

 

1) Timing of Sq. Ft. Growth – RH grew square footage by 9.6% in the quarter. By standard thinking, that should flow through to the top line. But over the past 4 quarters, we’ve seen sq. ft. growth in the 5%-10% range while the spread between Brand Comps and Consolidate Revenue growth has been flat to negative. We understand why that draws red flags. In the most recent quarter – that is mostly explained by the timing of the new design gallery openings in Melrose (10/24/14) and Atlanta (11/21/14). If we exclude the net new square footage from these two stores, about 50k sq. ft., square footage growth in the quarter would have been flat. With the 16k additional sq. ft. from New York and Greenwich offsetting the lost square footage from the Legacy Store closures in Berkley, West Nyack, and Providence.

RH - Why NSP is NOT An Issue - rh 4 9 chart1 

 

2) Shipping Window – The main reason we need to exclude the additional square footage from Melrose and Atlanta is because of the 8 to 12 week (even longer with the port issues) fulfillment window between the time an order is placed and the time that product arrives in homes. Because RH doesn’t recognize revenue until that order arrives in a consumers home, there has been almost 0 benefit from the additional square footage -- YET. This will change in 1Q and build throughout the year.

3) Legacy Store Closures – The company has been paring back its store portfolio for the better part of 7 years. It is finally to the point where all the ‘bad’ Legacy stores are history. We’ve thought all along that RH would not close as many of its remaining legacy stores from this point forward (which is inconsistent with guidance) as it would likely utilize the real estate in new concepts, and would also serve as a buffer for new Design Galleries, which – while bigger – are still arguably not big enough for the respective markets.

a) To offer up some numbers, RH has 64 markets by our classification, and when we analyze each one (which we did) they all have the spending characteristics on high end household furnishings to support at least a 7,000 sq. ft. Legacy Store. That’s calculated by looking at the 2018 addressable market, assuming 10% market share, and 1,200/sq. ft. in productivity.

b) The way the math works, 22 of the 64 markets could support a store between 25k sq. ft. and 39k sq. ft., 16 could support a store between 40k and 59k sq. ft., and another 22 have the market characteristics that could support upwards of 60k sq. ft (that’s 22 Atlantas). Note: in the chart below each bar represents a market where RH currently opperates. The height of the bar signifies the size of the store each market could support. Blue line is an existing Legacy store, red line is a first gen Design Gallery, and green line is an Atlanta.

RH - Why NSP is NOT An Issue - rh 4 9 chart2

c) The decision to close those markets was calculated – meaning that the company could capture sales lost in a closed market in one of its existing locations or online. Some of those sales are probably lost for good, but the dollars that remain get allocated to either the direct channel or another store which is already in the comp calculation.


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