Positive takeaways following my initial read through of 4Q09 results:


Earnings came in at $0.24 per share, higher than both my $0.22 EPS estimate and the street at $0.21.


U.S. same-store sales growth improved to -1% from -6% in Q3, better than my -3% estimate.  Trends continued to improve on a 2-year average basis as well.


Consolidated same-store sales came in -1% relative to -5% in Q3.


SBUX raised its fiscal 2010 EPS guidance range to up 15%-20% from its prior range of 13%-18%.


This guidance assumes “modestly positive comparable store sales.”  As I outlined yesterday in my earnings preview, I thought guidance above -1% would be a positive catalyst for the stock.


Management also raised its margin growth guidance for the U.S. to up 200-250 bps, from its initial expectation of 150-200 bps of improvement.


SBUX expects to generate free cash flow of $900 million in fiscal 2010, in line with its fiscal 2009 level (came in above the company ‘s free cash flow goal of $500 million).


The company exceeded its Q4 cost savings initiatives of $180 million in the quarter by $30 million.


U.S. operating margins of 12% in Q4 were in line with my expectations, up 760 bps YOY.


International operating margins grew 470 bps YOY to 8.8%.



WEN stated on its earnings call that Wendy’s October same-store sales declined 4%.  Although management stated that 2-year average trends are still up 1% as the company is lapping a difficult 5%-plus comparison from October 2008, this -4% number is a significant sequential step down from the +0.1% result in 3Q09 (-1.4% on a reported basis, which includes the negative impact of 300 fewer units YOY serving breakfast, as shown in the chart below).  Management commented that this -4% excludes the impact of removing breakfast so this number is even lower on a reported basis.


When asked specifically whether BKC’s $1 double cheeseburger could be somewhat responsible for the sequential fall off in trends, management attributed the softer result to both a tougher comparison and marketing in early October that focused on more thematic, brand repositioning “You Know When It's Real" advertising rather than value/price point advertising.


Based on MCD’s guidance for October U.S. same-store sales of flat to negative, both MCD and Wendy’s experienced a sequential slowdown.  Again, BKC did not provide any specific color around October trends, but it did say the $1 double cheeseburger had provided a lift to traffic trends in the markets where it had already been launched in fiscal Q1, and it was launched nationally on October 19.  If this product’s success continues, October will not experience the full benefit as a result of the mid-month launch, but I would expect to see some sequential improvement and then see trends move higher for the balance of the year.  My expectation mirrors TAST’s recent comments about its Burger King comparable sales trends.  Earlier this week, TAST said that it expects its Burger King same-store sales to turn positive following a -5% result in October.  Even this -5% number already showed marginal improvement from TAST’s reported -6.1% comparable sales growth result in 3Q09.




As expected, MGM beats the quarter.  Outlook was bullish, too bad Bobby slipped on the call



MGM reported strong numbers this quarter.  Most of the beat was driven by better hold and therefore EBITDA at MGM Grand and the Mirage, with some offset from weak hold and EBITDA at the Bellagio.  

"We continue to show sequential improvement in our operating results over the course of 2009...We continue to earn occupancy through our superior assets and focus on the customer, resulting in increased market share.  We expect CityCenter to grow our business significantly and we are extremely excited to open this tremendous asset"





  • It's not a stretch to say that in the 3rd quarter "our results were monumental" for the company
  • Exceeded even their own expectations for profits in the quarter
  • Continue to focus on efficiency without sacrificing guest service
  • Outperformed their competitors in all markets where they operate
  • Added market share in conventions, hotels, and gaming in Vegas and Macau
  • Bellagio had it's best baccarat drop but held low on tables
  • Don't "buy" occupancy
  • Bellagio's RevPAR decreased less than other luxury properties in the market
  • Confirmed 550k rooms in the 3rd quarter, putting them on a more "normal" pace
  • Returned to normal booking levels and are confident that next year will be even better
  • Believe that they are building market share coming out of a recession
  • Think that CityCenter will add volume to their surrounding properties 
  • "Have created an icon, a must-see property"
  • They are laser focused on the market, while others may be distracted with other markets and corporate transactions
  • Lead volume was up 9% vs last year. Meaning that corporations are trying to secure meeting space (Pharma, insurance and auto)
    • Oct was a big month for them
  • Conversion rates on booking inquiries are also increasing
  • Cancellations have slowed down dramatically and while they aren't back to normal yet, they are close.  90% of cancellations are for 2009, while 2010 & 2011 cancellations are minimal (isn't that obvious though)
  • Room nights booked forward are back to levels of pre-recession
    • But they have more supply going forward too, no?
  • Continue to produce sequential improvements
  • FTE's are 12% lower y-o-y and 17% lower than 2007
    • compares to 14% in 1H09
  • MGM Macau property level EBITDA of $73MM, $24MM was their share of operating results
  • Capitalized interest was $76MM in the quarter
  • Seeing a return to normalcy in their bank agreement
    • Provides them with their normal historical capital markets access
    • Have enough capacity on R/C to sustain them through 2010
  • $1.4BN of TTM EBITDA vs a $900MM covenant
  • Expect a lower y-o-y RevPAR decline in the 4Q
  • 4Q09 guidance
    • $10MM stock comp expense
    • $34-35MM of corporate
    • Pre-opening higher
    • $170-180MM of D&A
    • $250-260MM of gross interest expense
    • $40MM of capitalized interest expense
  • CityCenter details:
    • 12,000 employees, 3,100 came from other MGM properties
    • At Aria continue to see a steady pace of room bookings.  Pricing continues to be at a premium to Bellagio
    • Advertising and PR budget is $20MM for opening days
    • Expect to spend $27MM in TV media and print ad placements
    • 47% of retail SQFT open in Dec and over 80% by July 
    • Seen 50% increase in traffic at the retail site and 6 new units have entered into contract since the price reduction.  A number of buyers actually upgraded their unit
    • Closing at Mandarin in Jan and Vdara in March
    • $740MM left to fund, $7.5BN funded, $180 of sponsor funds left to be contributed



  • Think that visitation this year will be 35.4MM and 38.1MM in 2010
    • Project that there will be 54.4MM available room nights in the market, 5% increase over 2009
    • Think that their market share will increase next year and well as being able to maintain their occupancy
    • Think that occupancy will be 89% citywide and they will be north of 90%
    • Think table and slot win will be up double digits and that MGM will get more than their fair share
  • How much did hold benefit profits in Macau
    • Hold was about 3%
    • Extended reach to more junket operators
    • New management introduced
    • Did a lousy job before so easy comps too
    • Also construction projects around their property (One Central, L'Arc, Encore) are wrapping up/ have been completed and will get a right turn lane
  • CityCenter advertising dollars? How does that compare to Bellagio opening in '98?
    • $20MM upfront is about standard, $27MM is a little heavy - but thinks it's in the company's best interest
    • BOBBY SLIP UP "we are forecasted to have about 1.2 billion in revenues" 
      • I suppose Greff and most of the Street will need to lower their projections now
    • Want to take advantage of being the only new property opening up
  • Amendment #7 is the "exclamation" to the end of the amendment process with their bank group. Gives them back some of the flexibility they had before
  • Now that that facility has been paired back from $7BN to $5.5BN it's more manageable - facility doesn't go current until Oct 2010.  Expect they will start working on a new facility in 1H2010
  • Income stream from MGM hospitality
    • Have nine properties in contract
    • Just signed a new project in Egypt 48 hours ago
    • Make 10-15MM a year though these development deals
    • Have 30 deals in various stages (many in LOI or negotiation stage)
    • Think that they will make 100-200MM of EBITDA in the next 5 years...
  • Seeing similar banquet pickup a la - LVS
  • Have $244MM whole in CityCenter expected to be funded with condo proceeds, and believe that they will get more proceeds than that
  • Will be paying bills on CityCenter well into 2010, so from a condo closing timing standpoint should match up well
  • A lot of the rooms being added to the market are at the high end ... so can they fill them and maintain rates at their other high end properties
    • Indications on pricing are good for next year
    • A lot of the conventions and conferences they are booking are at higher rates
    • Expect continued robust occupancy next year
  • Rooms booked for next year - every quarter for 2010 improves, and lead times have expanded - seeing more rooms booked out 60 days +
  • Hooks on the convention side: have the most "value attractive" markets, many dates/ spaces desired in the past as now available, have more amenities than other markets
  • Taking share from other markets and competitors in Vegas
  • Convention rates are as much as $60 better than leisure pricing so as they get more convention business their ADRs should increase
  • Their hold % was just slightly higher than the top end of their range in Las Vegas
    • they down play the impact but the reality is 100bps above the high end could be several hundred bps better than last year
  • Forward room nights aren't same store.  Convention room nights are most at MGM Grand, also Aria doesn't have that many rooms
  • Murren says that he never said that RevPAR will be up 5-10% in 2010 - but visitation will be up 5-10%
  • Very interested in doing a Macau listing - and are working on it - will hopefully occur in 1H2010. But won't have impact on the NJ issue
  • Goal of $600MM of cost savings and how we can see what they have achieved, how much is permanent?  Jay Sugarman's addition to the board.  Normal run rate for other Capex?
    • Have taken out a little over $700MM of cost savings, 85% of those costs are reflected in the numbers already - they started some of this as early as '07 those programs are largely complete
    • FTE's was down 12% despite same occupancies
    • Believe that when things recover their margins will exceed those seen in the "early 2000's" (peak markets)
    • Jay Sugarman's addition was partly driven by growing HC costs, spend $400MM a year on healthcare
    • Have high capex this year as they prepare all their properties for CityCenter opening - $200MM (normal maintenance run rate) and should in that range next year
    • Will spend $10-15MM more on technology next year
  • Residential $200MM write-down was MGM's 50% share of the pain resulting from the 30% price reduction and their portion was a little greater
  • $2.44BN is still MGM's share of their investment in CityCenter
  • MGM has fully funded through their commitment to CityCenter - to be funded by DW's LOC

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Europe on the Tracks

Research Edge Position: Long Germany (EWG); Short UK (EWU), Short British Pound (FXB)


The announcements this morning from the BOE and ECB on rates was in line with our expectations:  both held steady at 0.5% and 1.0%, respectively. Yet divergence came with the BOE agreeing to boost its bond purchasing program 25 Billion Pounds to 200 Billion Pounds, whereas ECB President Jean-Claude Trichet signaled that emergency liquidity measures will be withdrawn.


To the former point, the BOE’s move to boost liquidity confirms more of the same—as the economy has underperformed expectations based on its stimulus measures, the government has thrown more money at the issue. Further, this comes after the government’s decision yesterday to bailout RBS and Lloyds for a second time to the tune of 31.3 Billion Pounds.  Certainly, today’s decision reflects disappointment with the country’s Q3 GDP number, registering -0.4% versus expectations of +0.2%, an underperformance compared with the likes of Germany and France that returned to modest growth in Q2. We continue to hold that the inability of government leaders to set a course of action to realize economic growth, along with ballooning debt through newly printed money will hinder fundamentals and market performance.


Returning to Trichet, who made headlines this week because of his “Black List” that includes members of the ECB committee that speak out in front of rate decisions, his mantra may be less is more. We interpret his statement today to reduce or withdraw former emergency liquidity measures as bullish on the margin. The Euro responded favorably, rising on expectations of a more stabilized economic environment.  In fact, with muted inflation concerns in Germany and France over the intermediate term, Trichet will have breathing room to diagnose regional health, including underperforming countries, to lead rate policy.


Despite our bearish outlook on the UK, one data point out this week was notably positive (and certainly surprised us), namely the October UK Services PMI number that registered 56.9, up from 55.3 in the previous month, according to Chartered Institute of Purchasing and Supply. This week we also had our eye on Eurozone Manufacturing and Services PMI (Reuters), which showed a slowing over the last two months in particular—including declines in Germany in Services and Manufacturing and an unchanged level in the Eurozone composite number at 53.0—making the UK’s push in Services (which account for ~40% of the economy) all the more impressive. (See chart below). However, we don’t expect as large of an increase next month in UK PMI as we forecast fundamentals to slow in 2010.


We’re currently long Germany and short the UK in our virtual portfolio as a pair trade. While the performance spread between the DAX and FTSE has narrowed in the last weeks, we’re comfortable with the TRADE.


Matthew Hedrick



Europe on the Tracks - UK PMI SERVICES 1



MSSR reported 3Q09 earnings after the close yesterday and same-store sales trends continue to be ugly.  Management seems to take some comfort in the fact that traffic trends improved sequentially from Q2, but with traffic still down 14.2% in the quarter relative to -16.7% in Q2, there is little to get excited about.  And, same-store sales growth actually got worse, -18.8% (from -17.3% in Q2) as increased value initiatives put pressure on average check, which was down 4.6% in the quarter relative to -0.6% in Q2. 


MSSR did join the list of restaurant companies that experienced less bad trends in October.  In response to a question, management stated, “Yes, actually we saw some deterioration month-over-month in the third quarter, July, August, September, which resulted in the 18.8% on the comp sales side.  But what we've actually seen in October is an improvement.  We're going to be at 13.9% on a comp basis – sales comp basis for P10.  More importantly, as we've said, we've seen some improvement in the overall traffic.  We're at a 10.4% year-over-year comp on traffic for October.”


In this challenging environment, most restaurant operators are talking about value and increased promotional strategies to drive traffic.  At the same time, management teams do their best to assure investors (and themselves) that they are approaching value in a way that will not be detrimental to their concepts’ long-term brand image.  This does not seem to be the case at McCormick and Schmick’s. 


Though not a newly announced change in strategy yesterday; management is not being promotional as much as deliberately acting to change the brand. Management even used the term “rebranding” in reference to its latest efforts to increase frequency at its bars and is attempting to broaden its target audience.  Management stated yesterday on its earnings call, “Over the past couple of quarters, I have outlined a broad strategy to evolve our concept with the primary goals of broadening our connection to a younger audience, increasing our brand relevance and improving our overall satisfaction ratings with our guests. This strategy involves rebranding our bar experience, expanding our culinary offerings and synergizing our marketing efforts. I am pleased to say we made good progress in all of these areas in the third quarter.”


Management is in the process of upgrading its audio-visual package to drive additional traffic during key sporting events and is offering significantly lower prices points on its menu such as 10 items under $10 at lunch.  These initiatives may help traffic in the near-term, but they seem to highlight a fundamental change in brand image.  With the 10 items under $10 lunch program already accounting for 34% of McCormick and Schmick’s lunch entrees, the value band offerings representing 8.4% of entree sales and the new $19.95 positioning on the culinary side running at about 11% of entree sales, it may be difficult to remove these offerings when economic conditions improve as they now make up a sizeable portion of sales.


These new offerings are in line with management’s communicated strategy “to broaden its guest space.” I just wonder if, over time, these initiatives will lead the concept into the casual dining “sea of sameness,” which as we have seen is not a much better segment to be in right now.





November 5, 2009





Coming out of last month where expectations were high and the results actually delivered even further upside, it was natural for an aura of bullishness to transcend the retail sector.  Adding more fuel to the fire was the substantial easing of comparisons as October began and a nice cold weather burst to spark the sales of seasonal merchandise.  As the month progressed, several companies began to report earnings and unanimously added positive commentary about the trends in October.  The culmination of this bullish wave came when a handful of retailers including TJX and JCG raised earnings expectations mid-month on the strength of sales and margins.  So, why the chronological recap?  Simply put, expectations finally got out of hand.  That is not to say the underlying trajectory for most companies is still gradually improving and there are an increasing amount of retailers now reporting positive same store sales in the absolute sense.  However, if we’re judging on relative performance, today looks more “normal” than it has in a little while.  There were winners and losers and upside and downside, which means we’re back to the reality of retailing as we enter what is now the most crucial time of the year.

  • Upside with positive earnings revisions: TJX, PLCE, SSI, ROST, HOTT, GPS
  • Upside to sales expectations: ANF, WTSLA, BONT, M, COST, JWN, SKS
  • Downside to sales (upside to earnings): ARO, AEO, JCP, CATO, KSS
  • Downside(essentially in line): TGT, FRED, ZUMZ, LTD, BJ, DDS








Some Notable Call Outs


  • It was only a short time ago when department stores started to move their merchandise up-market and as a result, we saw brands like Chaps secure their sweet spot in the middle-market with retailers like Kohl’s. Fast forward to 2009 and it appears that some of these trends and strategic merchandising moves are being unwound. On Warnaco’s 3Q conference call, management indicated that its Chaps line will now be carried in 300 additional doors across Bon-Ton and Carsons. The change is attributed to the consumer demanding more moderate priced apparel. Overall, this is a big win for Warnaco and Kohl’s (some may see this as increased competition while I see it as brand validation).


  • Despite conflicting reports in the liquidation channel as to the availability of goods for purchase as we head into the holiday season, Big Five Sporting Goods suggested that the environment for opportunistic buys in its product categories remains favorable. The company has already taken advantage of some great “value” driven opportunities and expects to remain flexible in its ability to procure further merchandise depending on the cadence of holiday sales. As it stands now, same store sales have accelerated post 3Q and are tracking up at a low single digit rate.


  • With 50% of Lucky Brand’s merchandise now priced at $99 or less, the brand’s major change in pricing strategy (lowering AUR’s) appears to be taking hold. After making major changes in pricing and the merchandise assortment, September same store sales posted a 26% decline. Just one month later, unit sales have picked up helping to drive October to a positive 1% comp. This is one of the more pronounced examples we’ve seen lately demonstrating price elasticity, especially in the denim arena.





 -U.S., EU Seek Trade Probe of China Raw-Material Curbs - The U.S. and the European Union asked the World Trade Organization to probe Chinese taxes on exports of raw materials used in the metals and chemical industries, escalating a third joint complaint against China. The duties discourage the export of commodities including coke, bauxite and manganese that are “critical” for U.S. and European manufacturers, while keeping them cheaper and available in China, the U.S. and the EU said yesterday.

Trade tensions with China have grown after the worst economic crisis since the Great Depression crushed global exports, leading the WTO to forecast a 10 percent drop in goods trade this year. Pascal Lamy, the WTO’s director general, said on Nov. 3 that the threat of protectionism may linger for another two years as countries attempt to protect jobs in domestic industries. <>


-Cabela's Sells Wild Wings - Cabela's Inc. announced the sale of its wildlife-art division, Wild Wings, LLC, to RDE Acquisition Company, LLC, which is owned by a former executive officer of Wild Wings. The closing of the sale took place on Oct. 30, 2009. Terms were not disclosed. As one of the leading publishers, distributors and retailers of wildlife, sporting and nostalgic Americana art prints and art-related products, Wild Wings represents more than 50 of North America’s top wildlife artists and Americana/nostalgia artists. Wild Wings reproduces original wildlife and nature artworks, sells such works as limited-edition prints and sells other collectibles through retail stores, the Internet and mail-order catalogs. <>


-September Outdoor Sales Down; Strong Equipment Sales at Specialty - Retail sales for all core outdoor stores combined (chain, internet, specialty)* declined 4% compared to last September, moving from $350M to $336M, according to the most recent edition of the Outdoor Industry Association (OIA) Outdoor Topline Report. Select equipment, accessory, outerwear and footwear categories continued their positive momentum in September. Year-to-date sales (January – September 2009) totaled $3.2B, down 5% from the same period a year ago. Labor Day fell on September 7th this year. That later date pushed the entire Labor Day Weekend, and the associated retail sales, into the month of September. The traditional Labor Day Weekend sales boost was captured in September’s Point of Sale data, not August’s as it was in 2008. Combined, August and September sales totaled $661M, a 5% decline from the same two-month period a year ago. All three channels saw slight declines for the combined August/September period. <>


-China boosts East Asian growth - The World Bank has upped its 2009 growth forecast for China from 7.2% to 8.4%, but says the nation needs to encourage more consumer spending. Consumer spending has remained high in China (around 15+ per year) since the world financial crisis began maintaining demand for western consumer products, vehicles, fashion items and luxury goods such as champagne. The Washington-based body also raised its projection of 2009 GDP growth in East Asia as a whole to 6.7% from 5.3%, thanks to China's strong growth. The World Bank also said that China, boosted by a recent stimulus plan, must move away from an industry and investment-based economy. "The economic rebound in East Asia and the Pacific has been surprisingly swift and very welcome, but take China out of the equation and the regional picture is less rosy," the bank said in a report.

"The rebound has yet to become a recovery." <>


-Kohl’s unveils its online strategy for the holiday season - Kohl’s Corp. is charting an aggressive course for its holiday season marketing strategy in an effort to reach cost-conscious shoppers. The company says it anticipates online sales during the holidays will grow by 30%. The company is planning to update its Facebook page—which has 700,000 fans—with holiday campaign offers and add a new function to its e-mail promotions that enables recipients to post sales offers to their Facebook pages. <>


-Nordstrom launches international web shopping in 30 countries - Nordstrom Inc. today announced that its online customers inside and outside the U.S. can pay in 12 different currencies and that the online store will ship to 30 countries. “We are excited about this opportunity to better serve our customers internationally,” says Jamie Nordstrom, president of Nordstrom Direct. “We’ve made it a lot easier for our customers abroad to shop from Sending great fashion merchandise from Nordstrom to friends and family overseas is also more convenient than ever for our domestic customers. <>


-Escada sells Primera brands - Escada, the German womenswear brand, has sold its Primera division to German private equity firm Endurance Capital. Primera comprises brands Laurèl, Apriori and Cavita. Luxury German womenswear house Escada previously signed a contract to sell the three brands to investment fund Mutares AG in May but withdrew from it on Friday, citing problems with the closing of the deal. Escada, which filed for insolvency in August, is expected to announce a buyer for the rest of the group this month. Sven Ley, the son of the founders of Escada, confirmed this week that he had bid for Escada. <>


-Versace Cuts a Fourth of Its Work Force - Whether presiding over a benefit gala at the Whitney Museum of American Art, where she is a benefactor, or being photographed for the tabloids with a haggard Lindsay Lohan or being honored at a celebrity lunch given for her by Tina Brown, Ms. Versace maintained her signature aura of high-maintenance glamour. But her composure, like her company’s Medusa logo, was a mask. Two days after Ms. Versace left New York to attend the Fashion Rocks concert in Brazil, Gianni Versace S.p.A., the family-held company over which she presides, announced that it would cut 26 percent of its worldwide work force, as many as 350 jobs. It projected a loss of $45 million in 2009 and no return to profitability before 2011. <>


-Unilever Net and Sales Beats Estimates on Price Cuts - Unilever, the world’s second-largest consumer products company, reported third-quarter profit and sales growth that beat analysts’ estimates after cutting prices in Europe to snare cash-strapped shoppers. Revenue excluding acquisitions and currency swings rose 3.4 percent, more than the 3 percent median of 13 analyst estimates in a Bloomberg News survey. Net income fell to 1.05 billion euros ($1.56 billion), the company also said today, exceeding the average estimate of 997 million euros. <>


-Snapfish’s retail pickup locations reach 10,000 under Wal-Mart deal - Online photo service Snapfish by HP is partnering with Wal-Mart Stores Inc. Inc to enable customers to pick up prints of photos they upload for processing to at Wal-Mart stores. Customers can now pick up photo prints or photo cards ordered on Snapfish at any of the participating 3,350 Wal-Mart stores as soon as one hour after placing their orders, Snapfish says. Snapfish customers locate and select a Wal-Mart store for pickup by entering their ZIP code at checkout. <>


-Google Introduces Commerce Search - Google Commerce Search was engineered with the online retail experience in mind. It purports to allow visitors to quickly find the products they seek; to filter results by category, price, brand or other attributes; to increase conversions and sales; to increase sales of specific products within search results; to conduct cross-sale and promotional offers; and to scale without glitches because of holiday-related traffic spikes. And all of these results are to be delivered alongside Google's analytics offerings for optimized performance and conversion. <>



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