KORS - Vetting Book. New HedgeyeRetail Product

Takeaway: We're launching our first 'Idea Vetting Book' next week, which will thoroughly vet the bull/bear case (and ultimate EPS power) for KORS.


On Thursday, May 7th at 1:00pm ET we will be releasing a new product for HedgeyeRetail subscribers aimed at Idea generation around battleground stocks in Retail, or those that simply pass through our initial Idea screening process and make it to our Idea Bench. These “Idea Vetting Books” are distinctly different from the Black Books you’ve come to expect from us (and should still expect from us in the same quantity). 


While Black Books are focused around our top ideas, the Vetting Books will go through all financial and operational puts and takes across TRADE, TREND, and TAIL durations sourced from a group of roughly 125 stocks. We don’t know where we’ll come out on a given name until the very end of our process – and in some cases, the answer might be that ‘the call’ is to do nothing with the stock. But we’ll explain in detail precisely why that is the case. This is and has been a core part of our internal investment process in sourcing what we consider to be Big Ideas, and with this product, we’re opening it up to our customers.



Next Thursday’s Vetting Book will be focused around Michael Kors (KORS). The name recently found its way onto our Long bench, after losing $8bn, or 40% of its market value over the past 12-months. How we see it, this name is likely a binary outcome. At $63 it appears to be trading at 14x earnings, but it’s probably not. The ‘e’ part of the equation is wrong. Either the company hits/beats earnings and the stock goes up meaningfully, or numbers come down materially, and the stock looks expensive at a much lower stock price. We’ll focus on vetting the near-term earnings drivers, long-term opportunity for growth as well as the cost of that growth, and ultimately, what the right size and margin structure is for KORS.


We’ll be hosting a conference call at 1:00 pm ET on Thursday, May 7th.



McCullough: Sir John Templeton and Signs of Market Euphoria


In this excerpt from this morning’s edition of The Macro Show, Hedgeye CEO Keith McCullough responds to a viewer’s question on where markets stand in light of Sir John Templeton’s famous quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

DFRG: Short on Strength

DFRG remains on our Investment Ideas list as a short.


DFRG: Short on Strength - 1


‘Twas a decent quarter. DFRG delivered a decent quarter highlighted by a $0.02 bottom line beat despite a top line miss.  Management also maintained 2015 EPS guidance of $0.95-0.98.  Double Eagle SSS of +2.3% missed the consensus estimate of +2.6% and represented a 130 bps sequential decline in the two-year average.  Weather did have a negative impact on comps in the quarter.  Sullivan’s, on the other hand, delivered higher than expected same-store sales of +4.8%, driven by a +8.1% increase in average check, offset by a 3.3% decrease in customer counts.  Sullivan’s benefited significantly from the inclusion of New Year’s Eve in the quarter.  A decrease in certain discounted bar menu items once again drove the decline in customer counts.  Two-year average traffic was down -0.4% and -4.9% at Double Eagle and Sullivan’s, respectively, in the quarter.  Despite trending negative for the majority of April, system-wide same-store sales are beginning to trend in the right direction.


DFRG: Short on Strength - chart2


DFRG: Short on Strength - 3


Continued weakness at the Grille. As a reminder, management is now reporting same-store sales metrics for the Grille concept, which declined -3.5% in the quarter, primarily driven by a decrease in customer counts.  Restaurant level margin decreased 80 bps y/y to 15.2%, due in large part to higher restaurant operating expenses (occupancy, marketing and advertising costs), partially offset by lower cost of sales.  Management is holding back its first Grille opening of the year until late 2Q15, in order to give them time to decipher their market research, train new managers, and execute several other initiatives around menu development, brand messaging, and architectural design.  By pushing back Grille openings, management is effectively masking the inefficiencies associated with growing this concept over the intermediate-term.  In our view, it is by delaying the rollout of the Grille that DFRG was able to deliver a decent quarter and very well could once again in 2Q.  Interestingly enough, by delaying the rollout of this concept, management risks exacerbating the negative impact of these openings when they hit the P&L all together in 2H15.  We’d imagine they think they’ll have their issues straightened out by then, but that’s a big bet to make and one that we’ll take the other side of until proven otherwise.


DFRG: Short on Strength - chart4


Cloudier days loom ahead. We recommend shorting DFRG shares on strength this morning, given a decent but underwhelming quarter, in our view.  Importantly, there was nothing in this quarter that dispelled our bearish thesis.  DFRG continues to be loved on the sell-side, despite the risks associated with the continued rollout of the Grille concept.  If the Grille continues to struggle or new unit guidance is cut, the stock should drop precipitously.  At this point, we’re simply not willing to bet on a turnaround here.  Incremental costs are likely to build to support the rollout over the course of the year which makes EPS growth of 15.2% on 16.1% sales growth look quite aggressive to us.  DFRG is in the clear for now, but cloudier days loom ahead.


DFRG: Short on Strength - chart5


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Keith's Macro Notebook 4/28: Japan | USD | UST 10YR


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

Global Gong Show Update: Japanese Retail Sales In the Toilet, Stocks Rise

Global Gong Show Update: Japanese Retail Sales In the Toilet, Stocks Rise  - Japan QE cartoon 04.28.2015

It’s a good thing $80-90 Trillion in QE is working right? In case you missed it, Japan reported a stink bomb of a Retail Sales report last night. Japanese Retail Sales fell -9.7% year-over-year in March versus down -1.7% in February.




What did the Weimar Nikkei do on the news?  It went up, of course! The Nikkei is up +0.4% to +15.6% year-to-date pre the BOJ meeting.

Global Gong Show Update: Japanese Retail Sales In the Toilet, Stocks Rise  - z japan


As I wrote in today’s Morning Newsletter:


As long as stock markets around the world continue to hit all-time highs, the central planners will look wholly innocent to many who think equity gains reflect economic growth. All the while, they’ll look wholly guilty to those analyzing the economic data.


Stay tuned—this Gong Show is going to get really interesting.


LEISURE LETTER (04/28/2015)




  • TODAY (4:30pm) - WYNN 1Q CC: ; pw: 20173922

  • April 29 (1:00pm)  -  HOT 1Q CC: ; pw: 17589434

  • April 29: New Hampshire House vote on 2 casino bill (SB 113)

  • April 30 (9:00am) - HST 1Q CC:

  • April 30 (10:00am) - MAR 1Q CC: ; pw:  99597993

  • April 30 (5:00pm) - BYD 1Q CC: ; pw: 3858748

  • May 4 (11:00am) - MGM 1Q CC: ; pw: 1535291

  • May 5 (11:00am) - HYATT 1Q CC ; pw: 17020089

  • May 7 (8:30am) - MPEL 1Q CC ; pw: MPEL


Galaxy - Galaxy Entertainment Group Ltd’s Broadway at Galaxy Macau, in Macau’s Cotai district, “will target leisure customers” from Macau and abroad, said Gillian Murphy, general manager of Broadway Macau and senior vice president of non-gaming operations at Galaxy Macau. The company opened online bookings about a month ago and demand “is exceeding expectations,” said Ms Murphy. “We are currently about two-thirds sold out for the first 90 days,” she added.


While no public announcement has yet been made about how many gaming tables Galaxy Macau Phase 2 will get from the government, Broadway Macau is likely to open with about 30 tables, Francis Lui Yiu Tung, vice chairman of Galaxy Entertainment, said late last month.


Takeaway: Strange that a month away from opening, no formal table game allocation has been given. "Broadway" not likely to make much money but good for government relations.


MPEL - City of Dreams (CoD) Manila casino resort is in talks with junket operators to bring in high rollers to the venue, said officials from Belle Corp, one of the investors in the complex. Vice-chairman Willy Ocier said that the City of Dreams Manila is boosting its VIP market, targeting to go “full blast” after May. Ocier confirmed to reporters that Suncity Group Ltd, the largest junket in Macau judged by share of VIP chip roll, would soon have operations at City of Dreams Manila.


Activity at City of Dreams Manila, which held its grand opening in February, has been in line with expectations, Belle CFO Manuel Gana said. “Mass market has been fairly healthy. We didn’t have VIPs yet in the first quarter. Since we opened, it’s a process of Melco [sic] signing up junket operators so that’s really what has been happening,” he reportedly said, adding that the company expects to see “significant growth in the near future”.


Takeaway: We find it hard to believe that internal expectations were for very poor GGR.  We're hearing a pretty big riff is opening between the equity owners. Stay tuned.


LVS (Marina Bay Sands) - Tweaks are still being made, with multi-level flagship stores being added to its mall and the reconfiguration of certain spaces to create an alternative ballroom. Celebrity chef Gordon Ramsay is slated to open a restaurant along the MBS waterfront this year. Between 60-65% of the resort's 9,400 employees are locals. 



PAGCOR - Income from gaming operations totaled PHP8.4 billion in 1Q 2015, up by 47% YoY. 


Takeaway: This would suggest a run of PHP 33.6 billion for 2015 or +12% YoY GGR growth.


SGMS - On December 19, 2014, the Company filed a complaint against IGT in the District Court of Clark County, Nevada seeking to enforce the terms of the

Bally License Agreement. On April 21, 2015, the Company received notification from IGT purporting to terminate the License Agreement as a result of the

Company’s alleged breach of the License Agreement.


The Company believes IGT’s claims are without merit and disputes that the License Agreement has been validly terminated. The Company intends

to enforce its rights under the License Agreement and the Bally License Agreement and will pursue such other remedies as it determines are appropriate.



SGMS - to provide End-to-End Systems, Games, Table Products, and Interactive Solutions for Baha Mar Casino & Hotel. Baha Mar, the $3.5 billion resort in The Bahamas, conducted an extensive evaluation and competitive bidding process before choosing a broad array of Scientific Games' Bally, Shuffle Master, WMS and Scientific Games Interactive products for its new 100,000-square-foot Las Vegas-style Baha Mar Casino & Hotel.

  • Casino resort opens with more than 300 Bally, WMS-branded slots, including premium performers Super MONOPOLY MoneyTM, TITANICTM, WILLY WONKATM, and Wonder WomanTM 

CCL - Coral Princess arrived in Los Angeles after reporting that 71 passengers and six crew members reported gastrointestinal symptoms during the April 12-27 voyage.



MGM - has sent a letter to shareholders in connection with its 2015 Annual Meeting to be held on May 28, 2015. 


Contrary to L&B's assertions, MGM is very well positioned to continue delivering value to shareholders and has a clear strategy in place to deliver on the Company's potential.  Major strategic goals and opportunities for MGM include:

  • Free cash flow generating development projects including:
    • MGM Cotai
    • MGM National Harbor
    • MGM Springfield
    • Mandalay Bay – room remodel and 350,000 square feet of convention space expansion
    • AEG/MGM Arena – 20,000 seat world class arena opening Spring 2016
    • New park & entertainment district adjoining Monte Carlo and New York-New York and leading up to the arena
  • Leverage target of <5x within three years
  • Increase financial flexibility to pursue future growth projects
  • Drive margin expansion via top line growth and cost savings initiatives
  • Expand on the benefits that the Company generates by incorporating diversity as a business imperative


Takeaway: We’re in MGM’s camp here.  The L&B analysis is flawed.


Casinos not increasing control over dealers - SJM CEO Ambrose So Shu Fai denied that Macau’s gaming operators are taking steps to exert stricter control over casino dealers in order to make it easier to fire them.  “Compared to the first quarter of last year, the warning letters that we issued out to our croupiers have dropped 25%,” So stated.


Meanwhile, Galaxy's VP of public relations Buddy Lam Chi Seng said that Galaxy has already hired 6,200 people of the targeted 7,000-8,000 people. Sands China Ltd also stated that the company had “no plan for redundancies” of workers.


Takeaway: It would be political suicide to cut dealers at this time.


Inbound visa policy - The government of Macau has already handed to the central government in Beijing a proposal seeking to “improve” the issuance of visas to travelers from mainland China, said Macau’s Secretary for Social Affairs and Culture Alexis Tam Chon Weng. Mr Tam did not share any details about the proposal, saying only that the government wants to attract more tourists from outside China.


Chinese state media reported earlier this month that China would limit the number of visits that residents of the southern city of Shenzhen can make to neighbouring Hong Kong. China’s Ministry of Public Security’s Exit-Entry Administration Bureau will restrict residents to one Hong Kong visit a week with immediate effect, compared with an unlimited number of daily trips previously.


Takeaway: If Macau govt wants to see visitation growth outside of Mainland China, they have their hands full.  On a TTM basis, visitation from HK, Taiwan, Other Asia, and non-Asia are down 4%, 4%, 3% and 6%, respectively. Visitors from Hong Kong have dropped in 11 consecutive months. Besides, it's tough to increase visitation from outside China by reducing visas from China.


Japan - Japan's pro-casino lawmakers have submitted a casino legalization bill to parliament, sources said on Tuesday, a move Prime Minister Shinzo Abe has supported as a part of his economic growth strategy. Lawmakers have said it was unclear when the bill would be passed. It has been delayed repeatedly amid opposition from lawmakers worried about gambling addiction.


Parliamentary records showed that members of the ruling Liberal Democratic Party, the Japan Innovation Party and the Party for Future Generations had submitted the bill, but it was unclear when it would be discussed or voted on.


Some members of the Buddhist-backed Komeito, a junior partner in Abe's coalition government, oppose legalization. Lawmakers in the pro-casino camp have said this opposition made it hard for them to push for the bill even though supporters slightly outnumber opponents in parliament.


Failure to pass the bill would also delay the drafting of a crucial second bill on implementation which outlines details on regulations.


Takeaway: With less than 2 months until the Diet concludes its current session, the submission of this casino bill may be too late.


Less discounting hopes - “We don’t have a specific pricing promise, but I can absolutely tell you that our goal is to raise pricing as we get closer to sailing,” said Andy Stuart, president of Norwegian Cruise Line. 


“I think Norwegian and Royal are both trying to discount less,” said Debbie Fiorino, senior vice president of CruiseOne/Cruises Inc.  


Other agents said Royal still has room to improve its policy. “Almost all of our price-drop issues occur in the 30- to 60-day window before sailing, when everyone who booked early is in penalty because that is when Royal is most aggressive,” said Don Baasch, president of Last Call Cruises in the San Francisco Bay area.


Beyond eliminating discounts, several lines said they were taking a variety of steps to encourage early booking.  


Takeaway:  Eliminating close-in discounting is easier said than done. Why would consumers book early when they can wait for lower prices from other lines who are not implementing a no-discounting policy? The only reason would be brand loyalty and that's hard to come by particularly with older ships such as RCL's legacy fleet. 




Macau unemployment - The unemployment rate for January-March 2015 was 1.7%, unchanged from Dec 2014-Feb 2015. Gaming employment fell 0.7% from the previous period (Dec 2014-Feb 2015) to 86,400.


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.

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