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SJM’s Oceanus appears to be off to a slow start. Escalators and better signage in Immigration will help. Sands Macau catches a temporary break.



It looks like the easy access from Immigration at the Macau Ferry Terminal into the new Oceanus property is proving not so easy.  Ferry patrons are in the habit of going forward toward the buses when they exit the Terminal.  Oceanus is behind the Terminal so customers need to be led to covered walkways connecting the property to the Terminal.  Poor signage and limited advertising are not helping and Oceanus is not getting the visitation early on that was expected.    Help is on the way as escalators that lead to the property directly from Immigration have already been approved. 



We remain worried about the impact of Oceanus on Sands since both are heavily weighted toward Mass, located next to each other, but Sands is not connected to the Terminal.  In the meantime, Sands Macau seems to be holding its own.

Reining in on Greece

As speculation abounds today that the European Union could offer Greece a rescue package to address its budget deficit issues, the reality remains that the lack of credibility in PM George Papandreou’s government is a serious one that looks far from over.


While a rescue package is at best a rumor right now, we’re of the camp that the fiscally conservative Germans, represented by Bundesbank President and ECB member Axel Weber, will attempt to own the debate and force Greece to clean up its own mess before the international community considers floating a deal.


As the uncertainty over the Greek state continues, we’re seeing the premium investors demand to hold Greek debt continue to balloon, as the chart below shows the spread between the yield on the 10YR German bund and the 10YR Greek bond continue to blow out. While the spread is just off its widest in the intermediate term, certainly the trend to the upper-right hand corner is bearish, especially if supply outstrips demand.  All the while, the country’s domestic equity market (Athex Composite) has been hit hard over the last week, as CDS prices continue to run up. 


We’ve had our pulse on the possible ripple effects from a shaking Greece. Note the recent depreciation of the Euro versus the US Dollar, down 3.2% since 1/13, and indication to us that while the Greek economy is around less than 10% of the German economy (or roughly the size of the German state of Bavaria), the issues surrounding Greece call into question similar stresses that may be ailing other European countries.  In our 1Q 2010 Theme call we noted that the countries of Spain, Italy and Portugal are on our watch list.


While we covered our short position in the Euro via the etf FXE in our model portfolio on 1/19 (regrettably a tad bit early), we remain long the USD via UUP.


Matthew Hedrick



Reining in on Greece - GR1


Reining in on Greece - GR2



Potential for a big FQ2 but the Street looks aggressive on March and June. FY2010 Guidance range of $2.30-2.55 is not at risk.



Judging from the stock trajectory this year, most investors correctly believe that the Street’s $0.58 EPS estimate for FQ2 2010 is an easy number to beat.  We’re 18% above the “consensus” at $0.66.  However, not unlike our commentary on IGT & WMS, the Dec quarter should be the last layup quarter for BYI in FY2010.  We’re only $0.03 (1%) below the Street for FY2010 but 8% below for the back half of 2010.  Part of the issue may be that the Street is too lazy to isolate the quarters in terms of new shipments and just makes the simplified assumption of a continued recovery in replacement demand as the year progresses.


FQ2 2010 Details:

  • EPS of $0.66 vs the Street at $0.58 and $0.59 last year
  • Gaming equipment revenue of $87.6MM
    • 5.3k new unit sold, 4k to NA and 1.3k to international markets
    • Parts & conversion kit sales of $8.6MM
    • Gross margin of 49%
  • Gaming operations revenue of $72.4MM and margins of 72%
  • Systems revenue of $61.5MM and margins of 75%
  • Casino revenues of $9.1MM and gross margins of 58%
  • Other: SG&A $53.6MM, R&D: $21.3MM, Net interest expense: $2.4MM






  • “Estimating fully diluted earnings per share of $2.30 to $2.55 for our fiscal year.” 
  • “Our 26% operating margin is the highest in the industry and we believe has the potential to increase to 28% to 30% over the next few years.” 


Gaming Equipment

  • “We continue to expect margin on our game sales will be in the high-40s over the next several quarters and we believe moving it into the low-50s is achievable within the next two years”
  • “We are selling more conversion kits and Gavin and his team continue to drive down the box cost. So that's one reason why we are cautiously optimistic that we keep it in the high 40s and eventually get up to the low 50s, as we sell more video and keep driving supply chain efficiencies.”
  • “I believe that Bally is underrepresented in North America and even more so internationally. There will be new and exciting international opportunities for Bally over the next 12 to 24 months. We've been building infrastructure in anticipation, and our team is ready to execute. We are excited about new opportunities for us in markets like Italy, Singapore, Australia and potentially, Brazil.”
  • “Domestically, we are focused on expansion opportunities in Illinois, Ohio, Kansas, Iowa, Maryland and Massachusetts. We are also engaged in expanding our already strong position in Mexico as it moves to Class III gaming and we are excited about opportunities in the Italian VLT market. We plan to reenter the Australian market in the next few weeks at a time when it is repositioning itself for large-scale replacements.”
  • “In Mexico, we now have over 70 casino sites running and over 14,000 games connected to Bally systems and the upcoming Class II to Class III migration there opens up very good opportunities for us. And we are negotiating significant agreements for both games and systems in Italy.”


Gaming Operations

  • “Our current order backlog for our newer premium product is the strongest we have seen in the past 12 months.”
  • Re: Mexico impact of Class III:  “We will sell more units down there because we haven't done a lot of that in the past. But we don't expect to see a big drop in our Gaming Operations business either.”



  • “We expect systems margins to get back to the 70s in the near future”
  • “For fiscal year 2010, which we expect to be in a range of $220 million to $230 million. Of this total, we expect maintenance revenues to be in the range of $58 million to $62 million.”
  • “I would say that in terms of overall visibility of the number given a considerable majority of it, we have pretty certain visibility to us.”
  • “When we think about systems margins after those adjustments, meaning that the cost of sales of services will now be charged against systems margins, we would still see systems margins to be in the low 70s% for the balance of the year. I'm not saying we won't have variances out of that, where it could be higher or lower but that would be the target range, low 70s.”



  • “While we do expect SG&A to rise in the second quarter, the successful resolution of our legal matters and the elimination of all previously-reported material weaknesses in our internal controls should enable us to effectively manage our legal and accounting spend in future periods.”
  • “We are using our excess working capital to prudently assist our customers in selected financing transactions, pursuing acquisition opportunities and repurchasing stock”
  • “I think 36% is a good proxy for an effective tax rate for the year.”

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The FED is behind the curve and the next few data points on the US economy and employment will drive interest rates higher.  The PPI is yet another data point that confirms our thesis.


Yesterday, the (BLS) reported that the seasonally-adjusted Producer Price Index (PPI) for finished goods rose month-to-month by 0.2% in December, following November’s 1.8% monthly gain.  Importantly year-over-year, December’s annual PPI inflation jumped sharply, again, to 4.4% (versus a 0.9% annual contraction for December 2008), the highest annual inflation rate since October 2008, following November 2009’s 2.4% annual gain. 


Comparing against collapsing oil prices in 4Q08, year-to-year change in PPI inflation has returned to a positive trend and should continue to increase as we move through 1H10.  Annual PPI inflation averaged a 2.5% contraction in 2009 against a 6.3% average gain in 2008. 


On a monthly basis, seasonally-adjusted December intermediate goods rose by 0.5% (up by 1.4% in November), with crude goods up by 1.0% (up by 5.7% in November). Year-to-year inflation was up across-the-board, with December intermediate goods up by 3.0% (down by 1.6% in November) and December crude goods up by 12.3% (up by 4.7% in November).


Howard Penney

Managing Director




I think we might now have an idea of how SBUX is going to market VIA.


One of SBUX’s smaller competitors, PEET, tried to make an entry into the single-serve segment by buying Diedrich Coffee (DDRX) but lost out to a competing bid by GMCR.  In a recent meeting with PEET’s management, the company communicated its continued desire to enter the single-serve segment.  Management gave no details, but I think another attempt at an acquisition is likely.  Whether it is through an acquisition or Peet’s creates its own position within the single-serve segment, the company seems intent on staying within the business of selling coffee, however, and does not want to get into the business of manufacturing single-serve brewing equipment.  Either way, Peet’s will face competition.


It appears that SBUX is also making a bet on the single-serve segment, but is entering the market in a different manner.  Last night on the SBUX earnings call, management said “Our customers have told us that their most frequent usages of VIA are in their homes or at work as a single serve option they favor for its flavor and taste and because and it does not require costly proprietary brewing equipment. Building on the broad customer acceptance through our retail channels we are ramping up VIA launch efforts through our retail company-operated stores outside of North America and poised to introduce distribution of VIA through North America and international channels in the third quarter of this fiscal year.  We're also planning to introduce additional premium coffee varietals and form factors to aggressively go after the at-home and office single serve markets as well as the $21 billion global instant coffee category. VIA continues to excite and represent a major significant opportunity for the company.”


In addition to being sold at Starbucks locations across the U.S. and Canada, VIA is also available at Costco, Target, REI and online at amazon.com, cooking.com and officedepot.com.  SBUX has plans to sell VIA in the grocery channel but has not yet announced when it will begin to do so.



January 21, 2009


Athletic footwear and apparel are setting up to outperform in 2010, which is consistent with our view that this will be a standout space in retail.





Athletic footwear sales were up again last week marking the 7th straight week of positive sales growth – the longest such trend in over 2-years. Coupled with our visit to Nike headquarters last week, this trend gives us further confidence that 2010 will indeed mark the year that athletic footwear outperforms. Other than a BTS induced two week pop in sales back in September, we have to look back to the 1Q of F09 to site positive sales. So what does this mean?


With sales of footwear strongest in February last year this trend is likely to cool as comparisons get tougher in the weeks ahead. However, the balance of the year lines up favorably with a product-driven demand cycle that we expect to see by mid-year as key players (i.e. NKE & UA) rollout new lines after some internal reorganization and arguably reinvigoration – also good for FL & FINL. This is not to take away the from the strength that we’re also seeing in apparel though less notable on the margin as it has outperformed footwear for the last 12-months.


The punchline? In broader retail, earnings revisions we’re looking at near-20x p/e on 25% consensus EPS growth expectations – a stark contrast to what we saw at the March 9th lows. Earnings revisions have been steadily easing over the past three weeks, suggesting that the magnitude of the upside after the sell-side overshot on the way down is coming to an end. When we combine that with our view that the athletic space will accelerate while the rest of retail decelerates, it is something to keep a keen eye on.


Our favorites include NKE, BBBY, FL, FINL, PSS and UA (we like it more after the print given the recent positive change in sentiment).  On the flip side, we don’t like ROST, JCP, M, FDO, and DG.


R3: ATHLETIC STARTING OFF 2010 STRONG - Footwear and Apparel in the Sports Retailer Channel




  • In an effort to emphasize Coach’s opportunity for growth in China, management offered some interesting statistics regarding brand awareness. Coach’s unaided awareness in China is currently 8%, while it is 72% in the US, and 63% in Japan. Interestingly, the Chinese consumer’s intent to repurchase Coach is 94%, a figure greater than in the US or Japan. Given the limited growth prospects remaining domestically, we expect to hear more and more about China over the next couple of years.
  • Keeping with the China theme, super-luxury brand Hermes recently (and quietly) purchased a Chinese brand called Shang Xia. The acquisition will allow Hermes to offer a lower priced product, locally sourced and tailored specifically to the Chinese luxury consumer. While it is very clear that the Chinese luxury consumer clearly favors western brands, the move is interesting in that it is an attempt to plant the seeds and cultivate a Chinese-only luxury offering. Additionally, this allows Hermes to appeal to a wider target audience without damaging its high-priced namesake brand.
  • With the winter Olympics on the horizon, marketing efforts are beginning to perk up. Labatt just announced that is joining the “unofficial” Olympic party with the opening of Club Bud, a party venue open for just five nights during the event. Interestingly, Labatt has partnered with the NHL, Lululemon, Under Armour, and Burton to produce themed evenings on each night. Molson is actually the official beer supplier to the Olympic games despite these “unofficial” efforts...




Deckers Outdoor Makes A Simple Decision - Deckers Outdoor Corp. is shifting some senior brand responsibilities and moving its Simple brand from under the UGG brand umbrella managed by Connie Rashwain to instead report into Teva brand President Peter Worley.  “This is an exciting opportunity for both the Simple and Teva teams to engage, exchange ideas, and collaborate, as we evolve and develop both unique brands,” stated Peter Worley.  “Connie Rishwain has lead and supported the Simple Brand and the Simple team to date.  This move will allow Connie to dedicate more of her time and focus on the UGG Brand and its continued future success.  We look forward to great things from the Simple Brand under Pete’s leadership,” stated Angel Martinez. <sportsonesource.com>


Istithmar's CEO Switch Ignites Speculation About Barneys - With David Jackson, the chief executive officer of Istithmar World, out of the job as of Tuesday, the Dubai-based investment company appears intent on accelerating restructuring efforts for its various operations, including its U.S. retail holdings, Barneys New York and Loehmann’s. Aidan Birkett, the chief restructuring officer of Istithmar’s parent, Dubai World, on Wednesday said Andy Watson would be interim ceo, succeeding Jackson. “We are pleased that Andy is stepping in as acting ceo of Istithmar World,” said Birkett, who is leading the moves by Dubai World to renegotiate $27 billion in debt. “His experience will be vital in actively managing the portfolio of assets held by Istithmar World.” Under Jackson, Istithmar World “expanded rapidly as a private equity investment house during the years before the economic crisis hit,” Birkett said, adding, “Today, Istithmar World is focused on the steady-state management of existing assets to maximize value rather than on private equity investment.”  <wwd.com>


Obama: will insist on consumer financial protection - President Barack Obama said on Wednesday he would keep consumer protection at the heart of his proposed overhaul of financial regulation, despite suffering a serious political setback in the U.S. Senate. It's very important to have a consumer finance regulatory authority that is willing to actually enforce the law, so that people aren't getting gouged," Obama told ABC News in an interview marking his first year in office. The White House separately said that Obama would discuss financial reform in remarks on Thursday after meeting in the Oval Office with Paul Volcker, the former Federal Reserve chairman who heads Obama's economic recovery advisory board. Obama's desire for a new consumer financial protection agency and other parts of his ambitious reform agenda became even harder to achieve after his Democratic party on Tuesday lost its 60-seat Senate majority in an upset victory in Massachusetts by Republican Scott Brown. This "supermajority" allows Democrats to overcome Republican delaying tactics in moving legislation through the Senate to Obama's desk to be signed into law. Republicans oppose key parts of Obama's plans to tighten rules on complex financial firms, whose reckless betting on the property market tipped the financial system to the brink of collapse in 2008. Its members have also opposed a financial responsibility fee he wants to slap on banks to recoup billions of dollars taxpayers spent on corporate bailouts. <reuters.com>


U.S.-Made Apparel Prices Flat in December - Wholesale prices for U.S.-made apparel were flat in December compared with November and rose 0.2 percent from a year earlier, the Labor Department said Wednesday in its Producer Price Index. Women’s domestic apparel prices declined 0.1 percent month-to-month, but were up 0.1 percent from December 2008. Men’s apparel prices were flat in December and increased 0.6 percent year-over-year. Prices for all U.S.-made goods rose a seasonally adjusted 0.2 percent in December, driven by a rise in food prices.  <wwd.com>


Global Output Set for Slow Rebound - World output is forecast to grow 2.4 percent this year, rebounding from a 2.2 percent decline last year, with emerging economies such as China and India leading the recovery, according to a United Nations report. The study estimated world trade volume, which fell 12.5 percent last year, will increase 5.4 percent. The rebound largely will result from $2.6 trillion in fiscal stimulus measures by major economies that “effectively arrested further erosion of confidence worldwide” caused by the recession, the report said. But U.N. economists cautioned the recovery will be uneven and fragile.  <wwd.com>


Americans See Economic Recovery a Long Way Off - Two-thirds (67%) believe it will be two or more years before recovery starts. Americans are thinking in terms of years, not months, when pondering how much longer it will be before the U.S. economy starts to recover. The vast majority (67%) believe it will be at least two years before a recovery starts, and nearly half (46%) think it will be at least three years.The findings are from a USA Today/Gallup poll conducted Jan. 8-9. With a full third of Americans (34%) saying it will be four or more years before a recovery starts, the mean response is 4 ½ years -- putting the average predicted onset of recovery well into 2014. Public opinion about the timeline for recovery is seemingly in conflict with recent economic reports suggesting the U.S. economy grew in the second half of 2009, possibly setting the stage for recovery this year. However, much of the current economic analysis is highly cautious, in part tempered by the continuing high rate of unemployment -- thus, perhaps, contributing to Americans' skepticism about a speedy return to business as usual. Americans' outlook for recovery today is similar to what Gallup found in July 2009. Americans living in households earning $90,000 or more annually are more optimistic about when recovery will occur than are those in households with lower income levels; still, the majority of all income groups expect to wait at least two years before the economy starts to recover. The extent to which the balance of power in Washington influences Americans' economic optimism is evident in the partisan responses. Democrats -- who generally have more confidence in the leadership of President Obama and the Democrat-controlled Congress -- are much more optimistic about an economic recovery in the near term than are independents or Republicans.Much of the responsibility for economic recovery will be assigned -- fairly or unfairly -- to President Obama. Indeed, already more Americans disapprove than approve of the job he is doing on the economy. In general, Americans do believe presidents' policies can influence the direction the economy takes. The poll finds about half of Americans -- regardless of party affiliation -- saying a president has "a great deal" of influence over national economic conditions. Another 35% say a president's policies affect the economy "a moderate amount," while 10% say they have little impact.The American public seems braced for a long road to economic recovery. Not only do most Americans expect to wait two or more years for a recovery to start, but the majority continue to believe the economy is getting worse. While such pessimistic views could help Obama in terms of keeping the expectations bar low, now that he is entering his second year, Americans are likely to increasingly judge his performance on the economy by his own economic policies. <gallup.com>

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