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DKS: Sandbag Confirmed

This morning’s preannouncement out of DKS reflects comp store sales up +2% from prior sandbagged guidance of down 6%-4%, and earnings north of $0.54 vs. the prior range of $0.41-$0.46. Let’s not mistake ‘a good quarter’ for ‘beating low expectations.’ With consensus at $0.49 already discounting what appeared to be overly conservative guidance, and the buyside whisper in the $0.50s, we’re not surprised in the lack of action in the stock today.


A few key points from the preannouncement include:

  • SSS outperformance began in the last week of November and continued through the holidays
  • Better than expected comp across all major categories
  • F09 full year comp includes Golf Galaxy, F08 doesn’t (note that Callaway last night noted that the golf category finally past its bottom)
  • But all that said, the 1 and 2-year comp trends at DKS are right in-line with peers, and in fact, represent a roll-over from what we saw in 3Q


Given the update from DKS, let’s take a look at the natural read through considerations for HIBB and FL. It’s important to note that ~55% of DKS revenue is generated by hardlines with only ~30% from apparel and ~15% footwear. On the other hand, Hibbett’s sales mix is the exact opposite (athletic footwear, apparel, equipment). A few points to note for HIBB in the quarter include Alabama’s national football title, which the company mentioned could add “a few” million to sales (1-2pts in yy rev growth) as well as the pickup in athletic footwear. Highlighted as the most challenging category on its call in November, footwear trends have been improving on the margin since. With the outlook for HIBB’s 4Q comps at -2% to +2%, there appears to be modest upside to this range and earnings.


Additionally, with FL’s mix predominantly driven by athletic footwear there is arguably less to glean from this morning’s news other than what we have already highlighted in recent industry trends. Consistent with our view, the focus on FL’s quarter is going to be less about headline results than Hick’s strategic plan for the business (for more detail see our 12/17 post “FL: The Footlocker Wish List”).


The bottom line here is that this is not really a big deal. For many reasons we’ve highlighted of late, we think that there will be a meaningful turn in the athletic cycle in 2010. THAT’s when we think we’ll see a meaningful acceleration out of Nike – which is the best play here. UA also makes the cut, as does FL and likely HIBB.


DKS: Sandbag Confirmed - Sporting Goods CompTable 1 10


DKS: Sandbag Confirmed - Sporting Goods CompChart 1 10




Over the last two days we have been making the case that a housing bottom is forming, but it’s a case of “Government stimulus vs. Gravity.”  Today, gravity is gaining momentum as government stimulus may be waning.


Sales of new homes in the U.S. dropped in December; the number of homes purchased declined 7.6% to an annual pace of 342,000, the lowest sales pace since March 2009.  For all of 2009, sales dropped 23% to 374,000, the lowest level since records began in 1963.


Part of our bullish call on housing in 1Q09 was based on the fact that the government was coming to the rescue of the real estate industry by providing enormous support to consumers wanting to buy a new home.  Not surprising, as the sales of news home began to take off in 1H09 housing prices (as measured by the Case-Shiller home price index) began to improve sequentially; though still declining year-over-year.


Yesterday’s Case-Shiller data, which is a lagging data point, showed that sequential home price momentum is starting to slow.  On top of this, we have now seen new home sales decline 9.3% in November and 7.6% in December.   It would only make sense that price support will wane further. 


As we head into 2Q10 we are starting to get incrementally concerned as we will be lapping the not as easy comparisons from late 1Q09/2Q09, particularly as gravity takes over from government stimulus.  This concern is reflected in our portfolio; we are short Toll Brothers (TOL).



Howard Penney

Managing Director


HOUSING BOTTOM FALLING? - housing v prices

Oil is Broken

We wanted to highlight a point from our morning call today, Oil is broken from both a trade and trend perspective.  As we highlight below, the next big line of resistance in the sand is the $73 level.  From a fundamental perspective, the action in Oil in the year to date is supportive of two of our Q1 Themes, Buck Breakout and Chinese Ox in a Box.


As we discussed ad nausea last year, the direction of the price of the U.S. dollar is critical for determining the price of those commodities priced in dollars.  In the year to date, the U.S. Dollar Index is up ~0.74% and, not surprisingly, Oil is down ~-6.61%.  While last year the inverse correlation was more like 4.5:1, early on this year it seems like that factor is accelerating.  One driver of this is likely the slowdown occurring sequentially in China.


As we wrote in our September 2009 Black Book on Oil, Chinese demand for oil, and demand for oil in China is a derivative of economic growth in China, is the single largest global driver for demand.  As we wrote then:


“China has been the primary driver of global oil demand over the past fifteen years. In 1994, the Chinese used roughly 3 million barrels of oil per day and fifteen years later the country uses north of 8 million barrels of oil per day.


This dramatic growth in aggregate oil consumption should be no surprise given the base from which the Chinese started. At a population base that was estimated at ~1.3 billion in 2008 versus the United States at ~304 million, the potential growth in per capita energy demand is fairly obvious. China has more than 4x the population of the United States, but uses less than half the energy of the United States.”


The decline in the price of oil is a leading indicator for what we will see in terms of economic growth from China in the coming quarter.


Domestically, supply of crude oil continues to be above its 5-year trend.  According to the DOE’s report last week, there are currently 23.8 days of supply of oil, which is ~3% above where supply was last year at this time.  If we compare price year-over-year from the release of this supply data point, so January 20th of this year versus January 20th of last year, the price of oil is up more than 100% . . .despite increasing inventories.


Until further notice, the price of Oil is broken.


Daryl Jones

Managing Director


Oil is Broken - oildj



Early Look

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In Timmy, Do You Trust?

For the sake of my arthritic hockey knuckles and their likely margin for transcription error, here is a paraphrasing of some of Timmy’s opening comments. Predictably, he went with the fear-factor strategy. This is consistent with Investment Banking Inc’s self-compensating view that “we didn’t see it coming” and “we had to purge the citizenry’s savings or we’d all be greatly depressed.”




‘the consequences would have been catastrophic…’


‘our actions cost us far less than the alternative…’


‘we were threatened like no time since the great depression…’


‘Your children, your security…’


‘AIG posed a threat much greater than Lehman…’


‘it stretched across the globe…’



This is a conflicted and compromised view. In Timmy, Do You Trust?  I don’t and neither does Mr. Macro Market. The market is down because the market fears this Bubble in US Politics.


The intermediate term TREND line of 1096 is broken. The next line of support is 1068.



In Timmy, Do You Trust? - geithner2



In the last 24 hours the latest reading on confidence and sentiment are headed in two different directions - confidence up, sentiment down.


Yesterday, the Conference Board’s January confidence index increased to 55.9 (higher than the Bloomberg survey) from a revised 53.6 in December.  The January figure is up 111% from the record low of 25.3 in February 2009, but 65% below the 92.3 average over the past 10 years.  This is the highest reading since September 2009, when the index stood at 61.4.


Like we have seen with the “bottoming” in housing statistics (both starts and prices), confidence is bottoming too.  While the popular press will make a big deal about yesterday’s move, any print below 60 on the Conference Board Index is just not that meaningful. 


The bottoming feeling in confidence was also seen in the ABC number reported last night.  The index improved to -48 from -49 last week.  Personal finances improved to -6 from -10, while the state of the economy deteriorated to -84 from -82 last week.   


The difference between the bulls and bears contracted dramatically to +15.7%; it was +33.3% last week and +37.5% two weeks ago.  According to Investors Intelligence, readings above +30% are very bearish.  The levels over the last two weeks were the highest since the spread was +42% at the October 2007 market peak.


The markets are fighting to maintain upward momentum as the S&P 500, the CRB and China are all broken on TREND and TRADE.  What is not working currently is the buy-the-dip mentality that has been in place since the March 2009 low.  The latest surge in pessimism, however, is a net positive for equities.


Howard Penney

Managing Director







MPEL should miss badly but that isn’t exactly new news. What will matter is the balance sheet issues and whether share can improve after a tough Q4 to capitalize on the strong market trends here in Jan.



We see a big miss for MPEL this quarter, largely driven by poor hold (and poor sell-side modeling of hold) at both Altira and City of Dreams.  Our $406MM revenue estimate and $23MM EBITDA estimate are respectively 42% and 20% below consensus estimates.  This miss probably won’t be a surprise since MPEL is down 25% since early December.


One major focus will be the balance sheet where MPEL needs to communicate its refinancing plans.  Also, investors will want to know whether MPEL’s dreadful Q4 market share has improved in January and whether City of Dreams has figured out how to drive the Mass business.  Macau gaming revenues are up 67% through January 20th which could be a positive for MPEL assuming its market share didn’t deteriorate further.  The negative will be if the VIP segment cannot withstand the slowing China economy, down stock market, and tightening liquidity.  These macro variables are hugely significant in driving VIP play.





City of Dreams

  • Net revenue of $243MM 
  • EBITDA of $22MM 
  • RC volume of $8.6BN and 2.5% hold 
  • Mass drop of $450MM and 17% hold  
  • Slot handle of $315MM and 6% win percentage 
  • Net casino revenues of $236MM, $23MM of non-gaming revenues and $16MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $156MM, $7MM of non-gaming related costs, and $57.5MM of fixed costs (remember that Hyatt should be fully open so there should be a step up in fixed costs from last quarter)



  • Net revenue of $138MM 
  • EBITDA loss of $6MM 
  • RC volume of $8.8BN and 2.3% hold 
  • Mass drop of $62MM and 15% hold  
  • Net casino revenues of $136MM, $7.6MM of non-gaming revenues and $6MM of promotional expenses
  • Variable expenses (primarily taxes & junket commissions that aren’t recorded in net revenues) of $120MM, $2.5MM of non-gaming related costs, and $22MM of fixed costs


Mocha Slots

  • Net revenue of $25.4MM 
  • EBITDA loss of $6.7MM




  • Net interest expense of $19.6MM, up materially from last quarter due to MPEL no longer being able to capitalize costs for CoD
  • D&A of $74MM
  • Pre-opening expenses of $5MM





Mass Market / COD ramp/ Present business

  • “The area where we have some heavy lifting to do to drive growth and improvement is in the grind mass-market business at City of Dreams. Although our growth trend in this segment continues to improve, we have not gotten close to our full potential yet. We are not going to provide our detailed marketing play-book in this area, but we have a clear plan of attack to boost awareness of the mass gaming experience at City of Dreams, which will drive visitation, length of stay, and, of course, profitability.”
  •  “We believe we'll end up with 2009 being 5% to 10% ahead of 2008 in GGR terms and we expect next year to deliver a top line growth of around 20% with limited additions in new supply.”
  • Our direct -- premium direct VIP businesses at City of Dreams is….17%, life to date.
    • Our math suggests that it was just north of 11% through 3Q09, and we assume 12% for 4Q09


Guidance/ Outlook

  • Response to lower market share in Oct 2009
    • “ We had lower hold on the rolling chip side across both properties in the month of October, as compared with the previous quarter…. also, October, remember, is a month that is distorted, particularly in the first week, the holiday week, towards the mass segment, so any month that is strong because of holiday periods, you're going to see that distortion downwards.
  • “We're probably looking like we're seeing better volume in November against October and that's against the background of a market that looks like it's grown north of 50% over the course of the first two weeks of November.”
    • November Junket RC volumes were up around 58% y-o-y for the market as a whole.   However, RC in Nov was lower for MPEL than the volumes they saw in Oct.  Mass win does look like it increased nicely month over month in November
  • “We're not going to provide any forecast in terms of the volumes that we expect to see in any segment of the business, not least of which because do one segment and it's not really a complete picture. But we've seen an improvement in the volume of drop that we have at City of Dreams of more than 35%, nearly 40%, if you look across the five months that we've been open as a property.”
  • “We would certainly expect to see our hold move from 16% up towards 18%, and the properties that are performing at the most efficient level in Macau are indicating that you can hold up to 20%, 21% on the mass side. So that's obviously a future target for us.”


Other (Cash flow/ Balance sheet/ Costs)

  • “We've got about $1.7 billion drawn on our facilities; we won't be drawing any more of the capacity that is there.  And we've already banked about $300 million in our balance sheet off the back of a couple of equity placements that we did earlier this year that will be used at some point during the earlier part of next year to effect an accelerated repayment of those facilities.”
  • “Construction of City of Dreams is essentially complete with the recent opening of Grand Hyatt Macau. We expect to outflow approximately $115 million in closing out final accounts on the site during the course of the fourth quarter of this year…  the remaining $40 million are really retention payments that apply to the warranty periods on the various construction contracts and they won't get settled until the early part of the second half of next year in the main. As we then look forward into 2010, there's about another $40 million of CapEx that is primarily associated with the final fit-out of the Dragone Theater. That equipment will arrive in Macau in early 2010 and so we'll pick up and be settling that cost during the course of the first half…. We've then put in place a program of additional CapEx expenditure that runs through 2010….roughly in the order of $40 million to $50 million, which is basically an application of what you would normally expect in the first full year of maintenance CapEx. But because we're under warranty periods, we'll push it into new developments, new amenity development.”
  • “MPEL-wide cost structure of approximately $1.3 million a day, and that obviously includes City of Dreams, Altira, Mocha, and our centralized and corporate costs. With the addition of the Hyatt property and its staff during the course of the last few weeks, that amount has increased by approximately $75,000 a day, so we're up to a little bit shy of $1.4 million per day.

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