Takeaway: Down across the board. SJM Palace on track for 2017 opening.


  • GGR down 40.3% YoY in 1H of 2015
  • EBITDA down 49.1% YoY 
  • Profit down 54.1% YoY
  • EBITDA margin down 8.5% YoY 
  • cost of labor increasing
  • Mass GGR down 26.8% YoY
  • VIP down 48.7% YoY
  • Slots down 12.3% YoY
  • Share of Macau GGR stood at 22.3% YoY 
    • 25.5% of Mass Mkt share 
    • 21.2% of VIP
  • Grand Lisboa 
    • GGR down 43.5% YoY 
    • EBITDA down 49.6% YoY
    • Profit down 53.3% YoY
    • OCC down 15.2% YoY
    • ADR up 2.3% YoY
  • Dividend of HK10 cents p/s was declared 
  • Challenging conditions in the market place and regulation to blame for the slow down in GGR. Tough to pin point where the bottom is. 
  • They remain optimistic on the Chinese economy, which will continue to drive GGR in the future. 
  • Junket closure and downsizing common theme, and could continue. 
  • OCC down due to VIP business decline 
  • New system has been deployed to sell rooms which has driven OCC in July. focus shift to mass and premium mass player has aided the uptick in OCC. 
  • Confidence remains very strong. Lisboa Palace is well underway. Foundation work is nearly fully complete. 
  • Cost control initiatives have already started. 
  • CapEX HK5.9billion in 2015, due to the opening of Palace. 
  • Major focus to still return capital to shareholders despite the challenging market.
  • Always looking to shift tables, feel that they have some opportunity to shift around more tables in 2H. 
  • Adding 11-14 tables for mass segment in Q4. 

Q & a 


Quantify the cost savings going forward?

  • Annualized savings are roughly HK50 million. Mostly due to labor attrition and decrease in headcount.

OCC up in July? To what levels? 

  • Targeting close to the high 80's low 90's 
  • Infrastructure is in place to accommodate the mass customers

CapEx tied to construction of SJM Palace? Plan with Adjacent properties?

  • Not a focus right now. Simply focused on finishing the SJM Palace.

Hold adjusted EBITDA for the Q?

  • No, do not have it calculated. 

Cost cutting measures? Potential in the future for more cost cutting vs. the competitors that are opening sooner than you? 

  • SJM pure gaming company, do not have a lot of non gaming initiatives that they can cut. 
  • Not replacing some of the labor they lost to attrition has been the opportunity to reduce costs. Might see more potential for this in the future, but it is not a focus.

Are you more socially responsible than your competition?

  • Yes, they feel as though need to remain a paternalistic employer. Many 2nd generation employees and even 3rd generation employees. 

Premium mass and base mass are outperforming competition through the summer


CapEx to peak in 2H and into 2017, what does that do to the dividend?

  • Dividend policy still stands, regardless of additional CapEx. 

Transit visa loosening, a tailwind?

  • Yes, starting to see stronger trends in July and August, especially on the mass and premium mass segment. 

August 12, 2015

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KSS | Comfortable with Short Into Results

Takeaway: Headline may be benign, but a lot in this print should support our Short. We maintain our view that annual EPS likely to never grow again.

Conclusion. KSS remains our top short. Do we think that the wheels will completely fall off the story with this Thursday’s print? No. But we don’t think we’ll see any notable upside, and we expect to see key metrics erode in support of our bigger call on the name that annual earnings are likely to never grow again. To put that into context, we’ve got numbers between $3.50-$3.75 from 2016-18. That’s 40% below the consensus, which has earnings marching over $6.00. The stock may appear cheap to some at an 11% FCF Yield (the most common bull case we hear). But we’d argue two things…1) while numbers are coming down, department store yields have gone well above 20% (just ask Dillard’s), and 2) our model has a lot less margin and cash flow, and only a 6.5% FCF Yield at $3.75 in earnings. Lastly, unlike with Macy’s and Dillard’s, there is absolutely no real estate play with KSS. So when all is said and done, we’d be short KSS into this print, and if the company throws the bulls a bone – as it does from time to time – then we’d get heavier on it. This is as much of a ‘core short’ as we can find in this market.


Here’s a summary of the key things we’re looking for in this quarter…

  1. The only way we expect to see the recent positive trend in store traffic to continue is if KSS gives it all back in lower merchandise margins.
  2. The only comp we’re likely to see will come by way of e-commerce, which is GM% dilutive by 1,000bp.
  3. Combining those two factors, we can’t reconcile how the Street could be looking for a 20bp improvement in GM% y/y.
  4. We’re also looking for growth in credit income (25% of EBIT) to continue to slow due to cannibalization from its Y2Y Rewards program, which should lead to contraction in its biggest profit center by year-end (without having to make a call on the credit cycle).
  5. There’s no real guidance one way or another with KSS, so it will be interesting to see how management handles Revenue expectations for 2H. The consensus is looking for an implied underlying comp acceleration from -1% to +3% over just two more quarters. That’s BIG for a company like KSS.



Comps Get Tougher. The sales line should be the biggest ‘driver’ of this print on Thursday (with the caveat that earnings are really not growing). Expectations have come down considerably since 1Q where the buy side was looking for 4%+, and Consensus has walked numbers down from 2% (10bps lower then where it sat before the 1Q print) to 1.5% over the past month which helps explain the 5% sell off. The 1.5% seems achievable from where we sit, but assumes a positive 2yr comp -- something KSS has only printed once in the past 9 quarters (4Q14).


Then, comps get much tougher for the company with current consensus estimates assuming that the company accelerates sales sequentially on a 2yr run rate from the -0.9% number reported in the first quarter to 2.8% in the 4th quarter. We don’t believe that KSS’ current arsenal of sales drivers: personalization, loyalty, beauty, BOPIS is enough to reverse the 3yr trend of negative store comps.

KSS  |  Comfortable with Short Into Results - KSS sales trend


If KSS has anything going for it this quarter, it’s that e-comm comps were extremely easy in the months of May and June (at 15% vs 30% in July). But, the company lapped the same benefit in the first quarter where comps were 12.4% and failed to realize the benefit. Traffic rank numbers which take into account both unique visits and page visits per user ended the quarter up in the mid 40% range, a slight acceleration from what we saw in 1Q. But, what we think is more notable is a) the accelerated ramp of JCP which is a big deal considering our works suggests that KSS was the biggest beneficiary of the JCP market share hemorrhage, and b) the relative underperformance of M compared to the group.

 KSS  |  Comfortable with Short Into Results - KSS ecomm


Gross Margin

Management’s bull case for this year was predicated on improving merch margins due to tight inventory management. That was well and good when the company entered FY15 with a sales to inventory at a favorable 5% (the first positive spread in over 3 years), but the SIGMA trajectory inflected in a meaningful way to the downside headed out of 1Q against the easiest comp of the year. That almost never equates to a positive gross margin event. Management tried to downplay the margin headwind of 5% inventory growth by calling out the growth in National brands which carry a higher AUR (units per store were up 1% vs. last year), but that also comes with its own margin pressure.


On the DTC front, e-comm caused 42bps of dilution in the first quarter, and assuming a 20%+ growth rate in the DTC channel (which the company no longer discloses) that amounts to 30bps of headwind for the year assuming of course that there is no further deterioration in e-comm gross margins. That’s a big hit for a company like KSS to handle especially when you consider that the company started this new rewards programs which equates to 5% cash back, National Brand penetration growing (a conservative 4bps to 7bps of headwind for every 100bps of mix shift), and the current inventory position of the company.

 KSS  |  Comfortable with Short Into Results - KSS Sigma


SG&A Comps


It’s tough to reconcile the company’s guidance of 3-4% growth for the quarter after management guided to 4%-5% growth in 1Q and printed 1.6%. But what we do know is that…

  1. Credit was a 13mm (70% of the dollar decrease) benefit in 2nd quarter of last year, that’s slowed over the past two quarters to 1mm and 2mm, respectively. We think that continues to march lower as the Yes2You rewards program continues to curb credit portfolio growth.
  2. 2Q14 was just the 2nd time in the past eight years that the company leveraged SG&A expense on a negative sales number.
  3. Employment costs are headed nowhere but higher. KSS management seems to be in denial about the added pressure from two of largest players in the retail space raising wages to $9, but the way we are doing the math by extrapolating the guided WMT cost pressure to the relevant number of KSS employees we get to 60bps of margin pressure and a $0.35 (8% hit) to earnings. That hasn’t manifested itself yet, and probably won’t until the retail hiring season kicks up in 3Q for BTS.

KSS  |  Comfortable with Short Into Results - KSS SGA Leverage


No Change To Guidance

No matter what the company prints on Thursday, it’s pretty clear that the company won’t make any material changes to its FY guidance. The company updated its guidance policy last year, and noted that it would only update its Fiscal year numbers once in the 3rd quarter.



There hasn’t been a lot to like on the Management front at KSS over the past few months.


First, KSS ended its 14 month search for a new Chief Merchant when it decided to add responsibility to the plate of Michele Gass current Chief Customer Officer. With the entire global retail industry  as a talent pool to source this position, Mansell picked the person who said very explicitly at the Analyst Day in October that 'love' would drive the business -- not once, or twice, but 19 times. Also, being a Chief Customer Officer (something that has no P&L responsibility or accountability) has nothing to do with being a Chief Merchant. This one will be hard for the bulls to defend.


And more recently, the company’s CIO, Janet Schalk, ended her 4 year tenure as CIO and jumped ship to Hudson's Bay citing a ‘great deal of uncertainty’ over the management transition taking place within the company centered around the hiring of a new yet to be named COO.

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As noted in our Snyder’s-Lance (LNCE) earnings note this morning, we will be hosting a live Black Book presentation on August 19th at 11:00am ET.



We view LNCE as a high quality, small cap name in the Consumer Staples space.  The company’s brands are well positioned in the snacking category to allow for sustainable volume growth and margin expansion for the next 3-5 years.  


Their direct-store-delivery distribution network (DSD network) is vital to success. It allows LNCE to have feet on the street, being stewards of the brand, working with store management and making sure product is always on shelf. Think about the power Coca-Cola harnesses by having their own distribution network, this is the same thing but for snacks.


M&A opportunities are abundant for this company as they look across the landscape. Management has stated that when thinking about returning cash to shareholders the first thought is on M&A, share buybacks and dividends come second. Angie’s, KIND Snacks, Justin’s and thinkThin jump to mind as possible acquisition targets.


A lot more to come as we dig deeper over the next week. Right now we are seeing 25%+ upside to the name driven by robust organic volume growth and market share gains.


We will be speaking with the company this week to dive a little deeper into some of our questions. To the extent you have something you want answered, please email us by either responding to this note or to our email addresses included below.



Toll Free:


Confirmation Number: 13616471

Materials: to be made available later



Howard Penney

Managing Director


Shayne Laidlaw



MCD: Adding McDonald's to Investing Ideas (Long Side)

Please note we are adding McDonald's (MCD) to Investing Ideas today.


Our restaurants team led by Sector Head Howard Penney will send a full stock report detailing our fundamental view later this week.


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Cartoon of the Day: Beijing Brings Out The Dragon!

Cartoon of the Day: Beijing Brings Out The Dragon! - China cartoon 08.11.2015


Hedgeye CEO Keith McCullough in today's Early Look


"After making up a 7.0 GDP number in Q2, the Chinese have quite publicly landed on their head. And, as you’re all accustomed to by now, the only ideological central-plan for that in this day and age is a currency devaluation..."

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