CityCenter sucks, other senior managers caused LVS's huge stock price decline, and moving back up to 3rd richest is most important. I'm paraphrasing and embellishing but you get the gist.



LVS Chairman and CEO Sheldon Adelson recently shed some light on a lot of issues.  I don't know if it is the light of truth but it is entertaining.  Here we go.




"Even though there is a lot of publicity about it, I haven't heard anyone who's seen it tell me it is going to be a winner. They have no strategy. They have no obvious plan. If they try to compete in the travel and tour business, they will cannibalize all their other properties, like the Bellagio. They don't have a convention space big enough to make an impact. So they built it without a strategy. How ill-advisable is that?"


- Negative comments by competitors is commonplace in the casino industry.  This statement is particularly harsh but may not be far off base.  The "without a strategy" comment is a little much.  The strategy was to capitalize on runaway consumer spending and housing prices.  We know how that is turning out.




"We did have a few bad managers, and they were the primary reason why our stock fell 99%. Those guys financed our expansion by borrowing against future assets (casinos) that generate income, rather than taking out normal project finance loans. It put us in a horrible position. Now those executives are gone, and I love coming to work again."


- Bill Weidner and Brad Stone, it's all your fault!  Why didn't you guys advise Sheldon to sell the company at $140 per share?  Normal project finance loans?  Most casino companies have financed their developments on their own balance sheet.  But hey, why let the facts get in the way of a good game of blame game? 




"My priority now is to get back to where I was, to be worth $40 billion again and rank third in America."


- World peace, eliminate hunger, top notch healthcare for all?  I'm a capitalist too but even if I was the greediest guy on the planet, I like to think that I would at least announce my greed in a more palatable way.  I'm in no position to judge though.  Even though he is no longer #3, he's still one of the tallest guys in the country, when he sits on his wallet (another Sheldon quote, this one from the good ole days).

The Week Ahead

The Economic Data calendar for the shortened holiday week of the 21st of December through the 24th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - ahead21

The Week Ahead - ahead22

Why the Euro is NOT a Buy

We’ve critically hit on (ad nauseam at times) the politicization of the Fed to keep rates low for an “exceptional and extended” period.  However, with Thursday’s decision by the Senate Finance Committee to vote in Bernanke for a second term now in the rear view and with the release of highly inflationary November US CPI and PPI numbers this week that even Bernanke won’t be allowed to ignore (+1.8% Y/Y and +2.7% Y/Y, respectively), we believe markets are increasingly pricing in expectations of a US rate hike.


As expectations for a hike move toward the near months we’ve already seen sharp impacts in the currency markets. In particular, the USD gained impressive upward momentum with the US Dollar Index trading positive for 5 of the last 6 day this week; and certainly yesterday’s monster move of +1% in the USDX contributes evidence that the Reflation TRADE is unwinding. US Financial (XLF) and Energy (XLE) stocks (proxies for inflation) are obvious examples of this.


As it relates to the Euro, increased bets that the Fed will hike and thereby reduce the spread between the US interest rate and the ECB’s 1% benchmark rate have begun to shift buyers away from the Euro. This week alone the EUR lost 2.3% versus the greenback. It’s lost -4.5% in the last month.


As we get more confirmation from the unwinding of the Reflation TRADE, we’ll look to take a more aggressive stance on global currencies. At times this year we’ve been short the US dollar via the etf UUP in our model portfolio. As it relates to the EUR-USD, the levels below suggest at the right price that we could get paired off, short the Euro, long the USD.  Stay tuned.


Matthew Hedrick


Why the Euro is NOT a Buy - Euro1


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

DRI – Glass Half Full or Half Empty?

DRI’s 2Q10 blended same-store sales did improve about 70 bps sequentially from Q1 on a 2-year average basis, but with comparable sales -8.4% at Red Lobster  on a 1-year basis, -1.4% at Olive Garden and -6.2% at LongHorn, these numbers do not point to a recovery.  Add to that, the 14.2% same-store sales decline at Capital Grill and the 6.1% decline at Bahama Breeze and it becomes glaringly obvious that this company is not yet out of the woods from a demand perspective. 


Management seemed intent on painting a favorable picture of trends on its Q2 earnings call.  Although management did say that “sales were a little more sluggish than expected,” it also said that trends look to be improving in December, which it recognizes as an early sign of a sustainable improvement in trends.  I do not have access to the same level of detail as that of DRI management and I have been called the Resident Bear at Research Edge, but some of the numbers management referred to in order to highlight these improvements do not tell the whole story. 


First, management said that the industry as measured by Malcolm Knapp improved during DRI’s fiscal Q2 on a sequential basis for the first time since Darden’s fiscal 4Q08.  Yes, on a 1-year basis, Q2 came in -5.9%, excluding Darden, versus -7.8% in Q1, which represents a 190 bp improvement.   Looking at 2-year average trends, however, Q2 trends were roughly even with Q1, coming in -5.6% relative to -5.8% in Q1.  Management also highlighted the fact that both average check and traffic trends for the industry got sequentially better in Q2.  This again, is not as impressive when you consider that these two metrics had already started to fall off on a sequential basis in the year ago periods.


Second, DRI went on to say that this pick-up in sales trends continued into December both for the industry and for DRI.  Although management said that the sequentially better numbers were partly attributable to weak year ago results, the company also recognizes the improvement as a sign of better trends to come.  Management was asked two times on the earnings call to address this improvement in December in light of last year’s numbers and whether underlying trends were really getting better on a 2-year basis.  The company did not directly answer the question either time.  Without this clarification, the comment that December got better on a sequential basis does not provide me with much optimism that we are experiencing a recovery in demand because the industry was down 9.5% in December last year.  We would have to see sequentially better numbers in December on a 1-year basis or we would have a significant fall off in 2-year average numbers.


Third, DRI provided the monthly comp numbers for Capital Grill, which it does not typically do, to show that trends got sequentially better throughout the quarter.  Again, for the quarter, Capital Grill comparable sales came in - 14.2% (or -11.2% adjusting for the holiday shift), down 17% in September, -9% in October and -6% in November (adjusting for the holiday shift).  At first, this sounded like a pretty impressive tick up in trends.  It is important to remember, however, that demand trends really started to fall off in October of last year.  Management would not quantify last year’s results on a monthly basis but said that results were not down as much in September 2008 and that there was a significant reduction in trends in October and November 2008.  I don’t understand why management would not just provide the numbers for last year, given that they gave them for this year (maybe, the numbers would point to two-year average trends that are not meaningfully better).  Without context around last year’s numbers, this so called improvement throughout the quarter is less meaningful.


Malcolm Knapp just reported that November casual dining same-store sales came in -4.6% with traffic -4.4%.  On a 2-year average basis, this points to a nearly 190 bp sequential improvement in comparable sales trends. 


This better number might be why Darden is more optimistic about future trends as this improvement in underlying trends is impressive (and very surprising to me).  This better industry number, however, makes DRI’s reported numbers look even worse because as the industry improved in November from October, DRI’s results at the Olive Garden got significantly worse in November on both a 1-year and 2-year average basis.  Red Lobster’s performance on a 2-year average basis improved from October but still ended the quarter in November worse off than where it ended Q1 in August.  LongHorn, on the other hand, did see some meaningful improvement throughout the quarter. 


Investors seem convinced by DRI’s glass half full view as the stock is up over 5% right now.  Judging by Malcolm Knapp’s November numbers, there could be some stabilization of industry demand, which would be a definite positive, particularly if it continued into December, but I think this just highlights that DRI is losing share.  During Q2, DRI outperformed the industry benchmark by only 200 bps relative to its 250 bp outperformance in Q1 and CEO Clarence Otis’ expectation (as stated on the Q1 earnings call) to outperform by 300 bps for the full year.  DRI’s gap to Knapp is narrowing.


DRI – Glass Half Full or Half Empty? - DRI Red Lobster Gap to knapp 2Q


DRI – Glass Half Full or Half Empty? - DRI olive garden gap to knapp 2Q


Back ended guidance of a 2010 yield recovery is disappointing following RCL's commentary of positive yields in 1Q2010 and a strong CCL run into the quarter.



1Q2010 guidance of constant dollar net revenue yield declines of 3-4% and EPS of $0.08-$0.12 is below consensus estimate of $0.17.  Full year 2010 EPS guidance of $2.10 to $2.30 compares to consensus of $2.32.  Here is the transcript from the call that just ended.




  • 4Q09 came in above the mid-point of guidance driven by stronger on board revenue trends, better close in pricing on ticket sales, better net revenue yields and deeper cost savings
  • Net ticket yields NA where down 17% and European brands declined 9%. There were declines across all ships
  • Net on board and other yields declined 5.7%.  European brands saw less declines than NA brands
    • Saw an increase in shops and photos for the first time this year
    • Saw sequential improvement in on board spend
  • 2009 capacity increased by 5.4%
  • Were very pleased with the European brands performance, which contributed 49% of operating income despite only being 33% of capacity.  Decline in yields was relatively mild despite an 8% capacity increase
  • Outlook for FY 2010:
    • Will continue to look for more cost cutting opportunities
    • Fuel and currency are driving their costs, and therefore costs are expected to be up 4-6%, but currency will also increase topline by the tune of 8 cents per share at current spot
    • Cruise capacity will increase 7.7%; 3.3% to NA brands and 11.9% to European brands
    • With continued strength in booking levels, on a capacity adjusted basis, occupancies are flat to last year
    • Pricing for cruises still hasn't recovered as much as they'd like but in selective areas they have been able to raise pricing (premium brands for example)
    • Pricing for all itineraries other than Mexican Riviera pricing have been up y-o-y over the last 13 weeks. Although Mexican Riviera pricing looks to be stabilizing
    • European brands are absorbing 12.2% capacity in the first 9 months of 2010, pricing is a little lower on a local currency basis but up on a US dollar basis. Continental Europe has a 19.4% capacity increase in the first 9 months of 2010
    • Brazil cruise pricing has been weak given capacity additions
  • 1Q2010 Guidance:
    • Topline is expected to increase 10% due to capacity additions
    • Current dollar cruise costs are expected to be up 1-2%
  • Beyond 1Q2010, fuel comparisons should become easier and higher recent ticket prices should have a positive impact
  • 1Q2010:
    • 9.9% capacity increase; 5.3% in NA
    • Occupancies flat, slightly higher in NA and slightly lower in Europe
    • Have very little inventory to sell
    • Pricing for NA Caribbean pricing is down moderately with Mexican Riviera down more.
    • European brands: capacity; 17% in SA and 11% in Asia.  Caribbean pricing is down moderately and down materially in South America
  • 2Q2010:
    • 8.8% capacity increase; 14.4% in Europe
    • 56% of NA capacity in Caribbean with pricing slightly lower than a year ago and Mexico is lower
    • Combined pricing for NA brands are running slightly below a year ago, but because current pricing is ahead they are forecasting higher pricing
    • European brands pricing is modestly behind year ago levels
    • UK brands are showing pricing ahead, but Continental Europe pricing is running ahead.  Expect flat pricing by the time the quarter closes
    • They expect prices to be flat in local currency
  • 3Q2010:
    • Early indications for pricing are positive
    • NA capacity 43% in the Caribbean, 25% in Alaska
    • Pricing on NA Caribbean pricing is lower but occupancies better, Alaska pricing lower but occupancies better
    • European Brands are 97% in European itineraries, pricing is running behind last year but occupancies are running flat with last year on an occupancy-adjusted basis


  • FY 2010 NA yields would be up 2-3% and why is FY2010 guidance so conservative given the quarterly guidance?
    • Will gradually improve yields each quarter, that's just how the numbers work - they're not sandbagging
  • How has Oasis affecting their pricing strategy for 2010?
    • Hard to quantify how they are being impacted.  Same thing with Norwegian's Epic.  Their bookings for the summer are holding up well
    • Seeing no impact, if anything they are getting more media exposure for cruising
  • Cost outlook is relatively flat excluding the dry docking impact
  • Ordering another ship for the Princess brand... will the yard take the currency risk?
    • Haven't completed the negotiations. They are willing to take a certain level of Euro exposure given thier business in Europe and can always hedge it
  • Premium brand comeback - saw evidence last quarter that it was booking stronger and ability to raise prices.  Continued throughout the 4th quarter.  The equity market recovery helped.  Thinks that the recovery will be faster/stronger than historical recoveries given the deeper drop
  • Booking curve: where they are for 2010 bookings are consistent with historical averages sitting in December with the exception of 2008.  Saw a little bit of an improvement in the booking curve this quarter
  • On-board spending did see a sequential improvement.  2010 forecasts assume flat spending to current levels
  • Are they going to reconsider hedging fuel?
    • Hedging is a short term fix and they can also charge a fuel supplement
  • Mix change due to less Alaska exposure.  As they move the Alaskan ships to other markets will that depress pricing since Alaska is a premium market?
    • Think that the ships will do better from relocations and the higher pricing tickets are offset by higher operating costs
    • One ship is going to another brand, another is going to Europe which also has high pricing
  • Where are they getting price increases?
    • Everywhere is doing better but Mexican Riviera and Brazil
  • As the business improves which areas will they target for reinvestment?
    • Port infrastructure is the only area outside of new ships that they have been investing in and they are very minor investments compared to cruise capex
  • 1Q2010 yield guidance is influenced by what they have on the books now and the little inventory they have left to sell
  • Are they hearing about any other new ship order discussions?
    • they are aware of some other ongoing discussions but lower than historical levels
    • 2013-2014 should have significantly less capacity increases
  • Interest in acquiring existing ships
    • not looking at anything now
  • Will discuss the dividend during the board meeting in mid-January, and will make an announcement shortly thereafter
  • European pricing strategy:  was pricing more aggressively early on in the booking cycle given the huge capacity increases.  Also the prices in Europe haven't dropped as much as US
  • Returns are better in their European business than the US business hence the shift of ships to Europe
  • 4th quarter booking trends are the best indicator for wave season.  They are optimistic about wave season
  • Too early to give guidance on 3Q2010 yields.  3Q2010 is most skewed towards Europe and will have difficult comparisons


Last night DRI reported significantly better 2Q10 EPS of $0.43 versus my $0.39 estimate.  As I said in my preview note, “the extent to which commodity costs prove favorable on a YOY basis is the biggest question mark and could provide some upside to my numbers.”  With comparable sales coming in slightly worse than my expectations, the earnings upside did, in fact, come largely from lower food costs.  My concerns for DRI and the industry in general are grounded in top-line demand and were well placed as it relates to the quarter DRI just reported. 


Reported same-store sales declined 1.4% at Olive Garden, 8.4% at Red Lobster and 6.2% at LongHorn Steakhouse.   Relative to my expectations, these results are in-line at the Olive Garden, worse at Red Lobster and better at LongHorn.  These results include the impact of a shift in the Thanksgiving holiday week, which moved to the fiscal second quarter this year from the fiscal third quarter last year.  Excluding the effect of the holiday shift, U.S. same-restaurant sales decreased 0.7% at Olive Garden, 7.6% at Red Lobster and 5.0% at LongHorn Steakhouse. 


Darden announced that it expects reported diluted net earnings per share growth from continuing operations of flat to +4% in fiscal 2010 versus the previous guidance of -2% to +8% (said last quarter that the lower half of the diluted net earnings per share range is more likely than the upper half of the range).


While the expected range of earnings in fiscal 2010 is slightly better, the top-line trends continue to slow for DRI with the company lowering its full-year blended same-store sales guidance range to -3% to -4% from flat to -3%.  Going back to my industry note from 12/01/09 titled “CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS,” the market is not paying up for slowing sales trends.  DRI’s full-year earnings outlook is better than the company anticipated in September due to lower food costs, but our Restaurants 2010 double-edged sword thesis suggests that this will come to an end sooner rather than later. 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.