US Consumer: Lower-Highs...

On US Consumer spending slowing sequentially, Howard Penney has been as right as the rain feels today in New Haven. If some people don’t understand that the Dollar Down doesn’t get everyone paid at this point, some of those people probably wouldn’t know they are getting wet when rained on either.


The better balance of the rally in stocks since the summer’s highs had everything to do with a US Dollar debasement. We called this Burning the Buck. As the Buck Burns, Debtors and Bankers get paid – the Consumers and Creditors pay the bill.


While I have covered our short positions in both US Consumer ETFs in the last 2 days (XLP and XLY), that was simply because they were down. I will re-short them, at a price. This is not a V-shaped or squiggly shaped Cinderella US Economic recovery. It’s the same kind of recovery we have had in 11 out of the last 11 recessions – 1 to 2 quarters in length, then the US Consumer will call it from there. Stay tuned.


For now, Consumer Confidence continues to make a series of lower-highs (see charts below). Americans are not as stupid as Washington thinks they are.



Keith R. McCullough
Chief Executive Officer


US Consumer: Lower-Highs...  - a1


BYD Gaming Q3 Conf Call



Soft quarter for BYD, particularly in the Las Vegas locals market, in both revenues and EBITDA.  The table below presents our view of the Adjusted EBITDA comparisons.  BYD missed our EBITDA estimate by almost $2 million driven by lower revenues. The Borgata EBITDA was surprising high.  YoY EBITDA actually increased 13% driven by lower operating expenses.


The company reported their own Adjusted EBITDA number $96.6 million which was below the Street at $104.3 million.  Revenues of $398 million fell below the Street at $413 million.


Two other takeaways from the release: 

  1. Echelon construction likely won’t be resumed for 3-5 years.  This is probably a positive.
  2. Spend per visit continues to decline – we’ve highlighted this in past posts and is consistent with our thesis on consumer spending.

We still don’t like the regionals (gas prices will be a huge headwind) and this release provided some corroboration of our thesis.  However, BYD at lower levels will start to look interesting given the attractive free cash flow profile. 






  • Reengineered business model
    • Cost efficiency – y-o-y improvement in operating margin and EBITDA at 3 out of 4 business units
    • LV locals market was the only negative standout
    • Las Vegas market is very challenging, won’t be bad forever. Confidence in long-term.  More cost efficiency will improve bottom line on rebound
  • Echelon halted for 3-5 years.  Reasons:
    • Long, deep recession
    • Consumer spending patterns changed for the worst
    • New supply (10k + new rooms) with depressed demand
    • Financing unavailable
    • Long term LV strategy remains intact
  • STN
    • Bankruptcy process costly and drags out
    • STN trying to restructure for nearly a year, no agreement yet
    • Ready to begin due diligence as soon as permitted
    • The bid is serious and BYD has capability to execute a transaction in the best interest of customers, employees, and Las Vegas.
    • Strategically fits BYD’s plan, makes sense for BYD shareholders 


  • High unemployment – 14%
  • Depressed house prices – 50% from peak
  • Lower spend per visit
  • Traditional summer seasonality
    • Very soft August (over half of $14 million EBITDA decline was from August)
  • Declines in ADR decreased EBITDA significantly
  • September saw a moderation in performance 



  • EBITDA rose yoy for third quarter in a row
  • Hawaiians coming
  • Hawaiian charter had little yoy effect, growth was due to operating growth


  • Market share growing
  • Delta downs tough comps in 4Q and going forward so recent growth rate will slow
  • LA lacks incremental demand needed to absorb more supply
  • Blue Chip EBITDA up 20% in Q3


  • EBITDA grew from focus on margin improvement and pursuing more profitable revenues
  • 18.9% marketshare in Sept., up 1.1%
  • Stabilization trend continued in 3Q.
  • Maximized EBITDA in reduced consumer spending environment


Balance sheet

  • Leverage was below 6.0x vs. 6.5x covenant. 
  • No capitalized interest ($10m last year)
  • Borgata leverage 2.6x. Covenant calc benefited from gain on insurance settlement due to water club fire.
  • Will remain in compliance with financial covenants
  • Reduced debt by $50 from Q2 to end of Q3



  • Tax rate will be the same in Q4 as Q3
  • Expect Borgata to pay larger distribution to its partners in Q4 as a result of insurance settlement
  • Borgata paid out dividend of $3.2 million in Q3



  • Any Echelon costs lingering in quarters going forward?
    • Only costs now are normal recurring of ~$15m this year and less in the following years. Very limited capex for Echelon going forward- $20MM in 2010
  • AC smoking ban               
    • Awaiting city council decision
    • Hoping for 25% of casino floor to be allowed to smoke
  • Sept moderated…was October better also?
    • We’ll see where it plays out. Gets slower past Thanksgiving. Withholding comment on 4Q for now
  • 3.6m gain from debt repurchases? Which notes were bought?
    • 30 m worth of bonds in 3Q – equally split between each of the three issues
  • Echelon. 3-5 years, will there be a skin put on it? Will anything be done to protect structure?
    • It’s in Vegas, good climate so little needs to be done. We’ll monitor it, though.
  • Weighing the prospective STN acquisition with other opportunities in new gaming jurisdictions? Distressed markets? Walk us through analytical approach to those? How does STN weigh out better?
    • We look at many opportunities each week. We see if they fit our strategy…if the market is growing…if it’s a good prospective market…our focus on STN does not preclude us from looking at other assets. We’ve looked at distressed assets and either we don’t like the asset, the market, or the price. We’re looking though.
    • Valuations can be appealing in this economy, but we are in an environment where acquisitions are more appealing than developments but that doesn’t mean we don’t look out for development opportunities
  • Interested in other locals properties aside from STN?
    • Sure ... if there was anything available that made sense
  • Blue Chip performance?
    • Summer is the peak season
    • Was up 20% of EBITDA, despite new Indian casino opening in August (Firekeepers)
    • Should continue to show growth in winter months
  • Plans for Dania?
    • Continue to monitor the market, and the state of the compact with the Seminoles
    • Waiting for the right time to make an investment there


Today’s Case-Shiller report showed that the composite index of home prices in 20 metropolitan areas rose 1.2% month-to month in August, above the consensus estimate of a 0.7% increase.  The magnitude of the increase, however, declined on a sequential basis for the first time in four months.  In July, the index improved 1.6% month-to-month.  Nonetheless, the rate of annual decline in home price values continues to improve. 


The question about whether these trends will continue to show sequential improvement rests on the upcoming November 30 expiration of the government's $8,000 tax credit for first-time home buyers.  Also impacting these housing numbers are the anticipated higher unemployment rates through year-end and the apparent trend toward lower consumer confidence numbers, which was more evident today following the disappointing conference board reading. 


These issues, coupled with a new wave of foreclosures hitting the housing market in early 2010, suggest that the improvement in pricing trends are sure to slow down and may even begin to deteriorate further.


As always, any discussion about Case-Shiller needs the disclaimer that the data we are looking at is for August 2009.  The more recent data that we have seen from the homebuilders and the housing market in general suggests that the trend is slowing.    Two weeks ago, it was reported that the National Association of Homebuilders housing market index dipped to 18 in October from 19 in September, falling below market expectations for a reading of 20.  While the index has improved significantly from the January 2009 reading of 8, it is only up from 14 in October 2008. 


In short, our current view on housing has not changed - Given the pace of new homes being built, the current inventory of unsold homes and the potential number of homes that are in distress is likely to increase.  Put simply: the housing overhang is here to stay. 


Howard Penney

Managing Director




EYE ON HOUSING PRICES - caseshiller1

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Steve's commentary

  • "It hasn't been too bad this quarter"
  • 1Q09 confirmed their worst fears for LV, 2Q09 wasn't much better, and in the summer things began to pick up
  • If things continue as they are they will beat the 08' results in Vegas this year and in Macau
  • If rate at Encore was $350 then annual EBITDA would have been $150MM higher
  • Room rates are still down because midweek rates are weak given lower business/convention travel
  • People that come to Vegas are spending less on everything 
  • Get the benefit of some Asian spill over
  • Capital structure (ie low debt) protects their franchise until the economy improves
  • You can always buy revenues, its the bottom line that matters - D&A is real (meaning capex) and so is interest expense
  • "Bigger is not better - better is better"... love the Sheldon shot
  • It's not about market share it's about the free cash flow and ROI - basically he's saying that his equipment is most productive and he runs his casinos most efficiently in terms of maximizing ROI per gaming position
  • Encore in Macau is completely budgeted and under control.  Opened some parts already will be 100% open by April
  • Prettiest and most beautiful thing they've ever built
  • Building was built to meet the needs of the VIP business in Macau... "in a hundred cunning ways it will ingratiate itself with the customers"


  • Domestic high end business - is that improving? 
    • International has held up well, but the high end domestic business has just not returned yet
  • How does the group convention calendar look for 2010/2011?
    • Booking window is still very compressed.  Hearing that people will start spending their budgets, but that won't happen until 2Q2010 they wait for things to stabilize
    • Had two large cancellations last week... I love how honest Steve is... he thinks that there is still political stigma coming to Las Vegas
  • Response to City Center?
    • Focusing on the fundamentals, employee morale and good service
    • They know that a lot of people will go and check it out... nothing they can do about that.  The experience they have at CC will determine whether they come back to Wynn....
    • If CityCenter cuts prices it will hurt them
  • Increases in expenses can be attributed to utilities/etc rest was seasonal and revenue driving (ie variable as a result of higher revenue)
  • What they expect in additional costs when Encore Macau opens?
    • They are very room constrained, more rooms will allow them to capture more mass market shares
  • What will they do with the IPO proceeds?
    • Protect himself from a dollar that is getting creamed... he's very worried about the depreciating dollar ... will hedge the weakening dollar.
      He sounds like Keith McCullough and the Burning Buck
  • Klatzin asks the question again... in a different way ... Hey Steve will you buy anything with all that cash?
    • Asia seems to be a better bet now.  Uncertainty in the US economy is devastating, and that impacts all of their decisions
  • Visa restrictions in Macau?
    • All the talk of about visa restrictions is becoming quite irritating, all media hype and noise
    • 50% of their visitors are from mainland china
    • Oct holiday was very strong and the period post holiday was seasonally slower as usual. Oct was good
    • "We don't feel uncertainty in Macau"
  • What about Singapore?
    • If the central government thought that Singapore was a threat to their gaming enclave, they change visa restrictions (and taxes)
    • Doesn't think that they lower tax rate in Singapore, and hence the ability of junkets to give higher incentives, will not be a threat to Macau
      • We are worried about Singapore... I wish someone asked the question on what % of Wynn's visitors come from SE Asia 
  • Cotai?
    • They are working on the project but won't discuss it until they are ready to
    • When I was there at the end of Sept there was nothing going on at the site
  • No comment on Acqueduct
  • Any changes to the government policy in Macau?
    • Use the visa program to balance quality of life for people living and working in Macau and the business well being in Macau
  • Corporate expense - little lower than where its been running? Comment
    • Yeah and SG&A was higher - which more than offset that decrease... can you say re-allocation?
    • Payroll cuts and cost control efforts - don't assume that that is a good run rate either
  • Dollar commentary and desire to get less exposure to that... what is he implying?
    • In the past they have converted all their foreign profits into USD ... re-evaluating that
  • Lots of projects/ land available in Las Vegas - any interest?
    • Until there is more certainty in the US they will not be expanding in the US
  • How much of the cost reductions we saw earlier this year will be sustainable
    • Garth Brooks in the 4Q09 - big deal
    • Bought him a jet so that he can come and go
    • First 20 shows are sold out, attracting a lot of people to Las Vegas that haven't come in a long time
    • Entertainment has been the trickiest thing to get right in this business... so bottom line they spent a lot of money on that
    • Other than that things should trend flat from here 
  • Accounting question about WYNN Macau 
    • NI attributable to non-controlling holders right below the NI line
    • Don't you wish that sell-side analysts understood basic accounting?
  • What will become of Fontainebleau?
    • Disconcerting to have half complete projects all around them
    • Another shot at Sheldon - sites 5 & 6
  • "Cosmopolitan is another pending disaster"

UA: Look to History

Hey UA… Here’s a recommendation for you… if you’re gonna suggest that Footwear, your hugest future revenue growth driver, is going to be flat next year, you may actually want to add that color to the press release.  No matter. What’s my view? As noted several times, the one potential shocker to this quarter would be increased SG&A growth to build a footwear organization. The company gave us that today. Given the strength of 3Q revenue – by a long shot – it simply did not matter to 3Q, and I don’t think it will matter much to 4Q either.


The salt in the wound came when UA noted that sales associated with that investment would be flattish next year. I don’t buy it. I think its McCarthy buying time, and keeping his hurdle low. This is not just my ‘gut’ (a gut is something that’s tough to invest with for me), but rather analysis based on historical precedent. Let’s look at McCarthy at Timberland.


He joined in May 2006 and was charged with the task of heading up the flailing ‘Yellow Boot’ business. This was about a third of sales, but 2/3 of profit – and was headed nowhere but down. He halted the decline over 2 quarters. He then grew the business for a year in the mid-single digits, while the rest of TBL shrunk by close to 10%. So of course, TBL pulled him away from the newly branded ‘Authentic Youth’ business, and made him co-president of the Company, while it took resources away from his former division.


The point here is that I agree that it will take some time for McCarthy to make a mark at UA, but the clock started ticking in August. UA will be selling product made under a process that is not his through April/May, and then ‘The McCarthy Product Transition’ kicks in for fall – not 2011 as the company suggests.


The company suggests about $0.97-$1.00 in earnings next year. We’re at $1.20. Then we’re at $1.75 the year after. 40% CAGR in earnings and cash flow? That doesn’t stink.


Conference call starting out strong.  October looks better than people may be expecting in both Macau and Las Vegas.



Steve Wynn stated that Q4 in Macau and Las Vegas will be up over last year assuming rebounding trends in October persist.  We had already projected that but the opening tone of the call sounds pretty positive.


The other item of note is that Macau Encore is coming in under budget.

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