- Observed premium and grind mass posted minimum bet levels were lowered on average again in March. Our new dataset, observed average bet levels, also continued its trend lower in March.
- We believe both metrics are indicative of demand. Minimum bet levels are a measure of pricing set by the casino. Observed average bet amounts are not as reliable but in the aggregate should directionally track true average bet. Average mass bet size multiplied by the number of bettors should equal mass volumes.
- The premium mass trend shouldn’t be a surprise. However, we’re most concerned with the trends in minimum bets and average betting levels for grind mass given the higher margins associated with this segment and the perception among analysts that it is still growing. The data suggests otherwise.
- Street estimates need to come down to reflect lower grind mass revenue assumptions for 2015/2016 and the associated negative margin impact.
- While Hedgeye remains below the Street in our 2015 EBITDA projection for all Macau operators, the largest disparity (10%) remains with LVS - the most exposed operator to the grind mass segment.
Takeaway: Latest data on bet levels in March corroborate our assertion that Street is underestimating the degradation in Macau’s grind mass segment.
Hedgeye CEO Keith McCullough can’t resist answering a subscriber question about Monday night's NHL first round matchup between the New York Rangers and the Pittsburgh Penguins, noting that there wasn’t much of a home-ice advantage for the Pens at Consol Energy Center.
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Brinker is a great company, but we fear it is becoming a victim of its own success. As it stands, the 16% earnings growth on 4.4% sales growth that consensus expects in FY16 looks aggressive to us, particularly with industry sales and traffic rolling over. We don’t see how they hit these numbers and expect estimates to be revised down as the year progresses.
Brinker kicked off restaurant earnings season this morning with a disappointing 3Q15 print, as same-store sales and traffic fell short of consensus estimates. Despite the soft top line, EAT managed to deliver in-line EPS of $0.94 due in large part to lower than expected other operating and G&A expenses. During the quarter, management repurchased 1.7 million shares of common stock for $104.2 million and paid a $0.28 dividend. The stock is trading down on the day, with the majority of the casual dining group following suit.
Soft Comps Are Concerning
After years of operating margin expansion driven by strategic investments within its restaurants (new kitchens, POS systems, fryers, tabletop tablets, remodels, etc.), the brand is entering a phase that will depend on top line trends for incremental leverage. Despite the recent menu innovation around the Fresh Mex and Fresh Tex platforms, we haven’t quite seen the bump in sales or traffic that most were expecting. Traffic declined -0.2% in the period, though it was +0.6% adjusting for the Christmas shift, and has now been negative in eight out of the past ten quarters. While Chili's same-store sales continue to outpace the industry, according to Knapp, its gap is narrowing. Management attributed this to the aggressive price increases competitors are taking and noted that consumers historically tend to push back once pricing reaches the 3% range the industry is currently running at. EAT took +0.8% pricing in the quarter and plans to take an additional +1% price increase in mid-4Q in order to offset some of the commodity pressure (burger meat, fajita beef, salmon) they are seeing.
Food & Loyalty Are The Future
While soft comps are concerning, management is betting that initiatives taken to enhance the menu will ultimately prevail and drive future growth. They expect the Fresh Tex menu to begin to resonate with consumers as they educate the market place on what exactly it is and plan to continue to leverage the Fresh Mex menu given its high profit margins. Chili’s also eliminated a number of low selling items from the menu, in an effort to streamline operations (improve speed of service, food delivery temperature, etc.). Management believes it has made, and will continue to make, the proper investments on the technology front (Ziosk, NoWait) in order to drive traffic in the future. Loyalty, in particular, will be critical moving forward and EAT now has the technology in place that they can leverage to support this effort.
The Earnings Algorithm Is Changing
It’s clear to us that the fundamental earnings algorithm of the company is changing. A model that once heavily relied on a seemingly endless stream of strategic operational improvements to increase margins is now transitioning to one dependent on sales and traffic growth. This concerns us given recent trends and will continue to heading into FY16. Loyalty could ultimately be the top line driver the company has been missing, but we suspect ramping up the program will take longer than most suspect. Brinker is a great company, but we fear it is becoming a victim of its own success. As it stands, the 16% earnings growth on 4.4% sales growth that consensus expects in FY16 looks aggressive to us, particularly with industry sales and traffic rolling over. We don’t see how they hit these numbers and expect earnings estimates to be revised down as the year progresses.
In this brief excerpt from today’s morning Macro Show, Hedgeye CEO Keith McCullough takes a look at the message of the bond market, Fed fund futures, and the “dots.”
Click here to watch the full edition of The Macro Show from April 21.
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Takeaway: The momo has stalled.
CALL TO ACTION
RCL was the darling in 2014, up 74% in share price. 2015 is a different story as the stock has lagged CCL and NCLH, -11% YTD versus +3% and +11%, respectively. While the stock clearly got ahead of itself, we also think RCL is facing some fundamental headwinds, particularly in Europe. For the last several months, we’ve been highlighting emerging weakness in Europe and it appears that RCL’s Q1 and forward guidance corroborates our monthly pricing surveys.
Moving forward, 2015 estimates are no slam dunk as European uncertainty remains. Given our current estimates, we think there’s a chance they miss Double Double targets in 2017. RCL’s still elevated valuation leaves little room for error so we’ll stay negative.
Please see our detailed note:
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