The Macau Metro Monitor, March 19th, 2010



Analysts at Citi believe gaming revenue for the first 16 days in Macau reached ~MOP 7.5bn, up 58% from last year. Assuming the current run-rate, Macau's gaming revenue could reach a new high in March of ~MOP 14.5bn.The firm said SJM is the only winner in terms of market share gains for the month; Wynn, MGM and Melco-Crown have lost 1% each in market share in March so far versus February.



After the release of the report by the New Jersey state attorney general's Division of Gaming Enforcement connecting Stanley Ho Hung-sun to organized Chinese crime, MGM CEO Jim Murren made these remarks:

"The DGE's report acknowledges there is no evidence that Pansy Ho has engaged in any wrongdoing or been accused of any illegal activity. MGM Mirage structured its business relationship with Pansy Ho to ensure the highest standards of operation and compliance with all applicable gaming laws and to protect against any improper influence. We have had a very positive working relationship with Pansy Ho and have a spotless operating record at MGM Grand Macau."


According to the report, throughout 2001, with its eye on one of the three casino licenses to be awarded upon the opening up of the Macau market, MGM held talks with New World Development chairman Cheng Yu-tung about a joint bid.The report says Cheng and Chan Siu-hung already operated three VIP rooms at Stanley Ho's casinos, and MGM explored a partnership in which the US firm and New World would each take a 40% stake and Chan the remainder. However, negotiations fell apart and when the three winning bids were announced in February 2002, MGM had come in fifth. "We licked our wounds for a bit and then tried to analyze whether there were any other opportunities for us to enter the Macau market," former MGM executive vice-president and general counsel Gary Jacobs told the DGE investigators.


In April 2002, Stanley Ho along with business associates and family members including Pansy Ho and Daisy Ho, traveled to Las Vegas at the invitation of MGM. Stanley Ho had dinner with Wang, MGM's then chairman and CEO Terrence Lanni and billionaire Kirk Kerkorian, the report says. Stanley Ho agreed to continue negotiations and appointed Pansy Ho as his representative to broker a deal with MGM. The aim was to create a 51-49 joint venture to be led by Shun Tak Holdings, where Pansy Ho was managing director.


By July 2003, Pansy Ho and Lanni had exchanged formal letters acknowledging the structure and basic terms of the proposed joint venture.But the following month, MGM executives including Lanni and Jacobs were called to a meeting with Nevada Gaming Control Board member Bobby Siller, who informally advised them regulatory approval from Nevada would be a "very difficult path" and said he would not approve any Macau partnership that involved Stanley Ho or his firms Shun Tak, SJM or Sociedade de Turismo e Diversoes de Macau (STDM).


New Jersey was never MGM's main market, but the firm was Nevada's biggest taxpayer and the largest private employer in Las Vegas. Stanley Ho "was upset by the news", Jacobs told New Jersey investigators. But in November that year, MGM was negotiating a new and separate partnership with Pansy Ho directly, in her individual capacity.

The new joint venture between MGM and Pansy Ho was formally agreed in June 2004 and called for an initial cash contribution of US$360 million. MGM executives were worried that US regulators would take umbrage if Pansy Ho received her share of the funds from her father.


MGM increased its contribution to the venture by US$100 million "as a 'premium' to Pansy Ho for the ability and opportunity to be in business with her in Macau", and thereby reduced her share of the burden by US$50 million, the report says. So Pansy Ho's initial contribution was US$80 million, and the report concludes that US$72 million, or 90% of that, was tied back to her father. The partners purchased a "subconcession" casino license from SJM in April 2005 for US$200 million.


The DGE report concludes: "MGM's compliance failings ... were pervasive and persistent, suggesting that the company's fervour to [enter] Macau compromised its commitment to regulatory compliance." The Nevada regulators unanimously approved MGM's partnership with Pansy Ho in March 2007.



In 2009, Macau's GDP grew by more than 8% with a near 10% increase in casino revenue. With a budget surplus of nearly MOP 24BN, CEO Chiu has maintained his predecessor's policy of cash handouts to everyone.  Chui intends to give out bonuses of 6,000 patacas for permanent residents, 3,600 for non-permanents and a subsidy of 5,000 for the elderly enable people. In January 2010, it injected 10,000 patacas into the central provident fund accounts of 330,000 residents aged over 22. Although continuous cash handouts will represent social value, they are not the long-term solution to the social side effects of a gaming economy, including the wealth gap, inflation, high housing prices and illegal workers. The financial crisis was a reminder that Macau must rethink its social priorities and develop a broader economic strategy. Focusing on the development of education and tourism infrastructure would do a lot to improve skills and create jobs.



Hainan, China's only tropical island, will not follow Macau's example of becoming a gambling hub, according to Tan Li, vice governor of southern China's Hainan Province. With aspirations to be a top tourist destination, Hainan will focus on developing its lush tropical gardens to become an "all-seasonal" hot spot.

R3: Sisyphus Meets Retail


March 19, 2010


The Greek myth of Sisyphus is personified in what we’re seeing in retail today.  Retail as a whole has rolled the rock up the hill and shortly approaches the period where we find out who gets crushed and who reaches the top. 





As a punishment from the gods for his trickery, Sisyphus was compelled to roll a huge rock up a steep hill, but before he could reach the top of the hill, the rock would always roll back down again, forcing him to begin again. The maddening nature of the punishment was reserved for Sisyphus due to his hubristic belief that his cleverness surpassed that of Zeus.


The Greek myth of Sisyphus is personified in what we’re seeing in retail today.  Retail as a whole has rolled the rock up the hill and shortly approaches the period where we find out who gets crushed and who reaches the top.  With most retailers having reported 4Q numbers, we aggregated the positioning in our SIGMA analysis – which measures the triangulation between sales/inventories and margins for each company.


We’re seeing unprecedented uniformity in the positioning among retailers in our SIGMA analysis. As a reminder, this analysis shows the trade-off a company is making at any given point in time on the balance sheet to drive the P&L, and vice versa. In a perfect world, both the balance sheet and P&L are headed in a positive trajectory at the same time. Today, we are looking at 61% of the 108 companies in our analysis in the ‘sweet spot’ of our analysis (sales growth outpacing in inventory growth, and margins headed higher), which is up from a mere 32% in 2Q and the 50% in 3Q. We have not seen a more meaningful positive move – ever. ‘Ever’ is a long time. As one might imagine, the stock moves associated with moves from one quadrant to the next are meaningful. Whenever a company moves out of Quadrant 1 – or even heads to a less attractive place in that quadrant, it is a negative stock move. And I’m not saying ‘sometimes it is a negative-ish move.’ We’re talking a .95x R2 with the average move squarely in the double digits.


What’s our point here?  Welcome to 2010. It is a stock picker’s market. Generating alpha by way of getting the group call right doesn’t matter anymore. Company fundamentals matter, and they matter big. When we re-run the analysis below in 13 weeks, we won’t see 61% of the companies in the sweet spot. Pick your battles…


We have a SIGMA book with 108 companies, which helps our team (and our exclusive Retail vertical subscribers) focus on which companies are interesting and at what time do they become actionable.  Let us know if you’re interested. We’ll be around all day.


R3: Sisyphus Meets Retail - SIGMA Positions Chart 2


Zach Brown

Hedgeye Retail




  • In a subtle but notable move, Barnes & Noble founding family members, Len and Steve Riggio, passed the CEO torch to William Lynch. Lynch has been with the company just over a year and has been running the .com and digital business. While the company remains committed to retail, it was noted that the future growth of the company is likely more rooted in the digital business. While there are no plans to close stores in a meaningful number, there are also no plans to add meaningfully to the 900+ store base. 
  • Ross Stores expects to expand square footage by 4-5% in 2010, with an increasing emphasis on the company’s lower-price format- DD’s Discount. Interestingly, the company expects to ramp up growth to about 7% in 2011, with an increased focus on entering new trade areas. DD’s expansion is forecast to be P&L neutral in 2010 from a margin perspective. 
  • GameStop made two notable points on the composition of its inventory. First, used game inventories coming out of the holiday ended up lower than expected which has prompted management to use promotions to drive trade-ins. Second, management noted that there is still a shortage on the hardware side of the equation, with PS3 and Wii still experiencing supply constraints. Management believes it will be a couple of months before adequate supply is available. 




Anthropologie to Launch International Site - Anthropologie is ready to reach a global audience with the launch on Saturday of its first international Web site. The new site,, will be priced in a variety of currencies, including euros, pounds and Swiss francs, and will deliver internationally from a U.K. warehouse. James Bidwell, Anthropologie’s managing director for Europe, said the site would have the same product assortment as the company’s London stores, the second of which opened Friday on The King’s Road. He said the site offered an opportunity to gauge the interest of the international market in Anthropologie. Depending on the response, he said, foreign language versions of the site may be launched. Bidwell added that an Anthropologie mobile phone application was also in the pipeline so international customers could shop from the road. Bidwell said the launch of the site is a major step toward positioning Anthropologie as a “global, customer-focused, channel-neutral brand.”  <>


Sperry Top-Sider Hires Bill Bettencourt as SVP, Sales and Marketing - Sperry Top-Sider, a division of Collective Brands Performance + Lifestyle Group, announced that Bill Bettencourt has joined the Sperry team as senior vice president of sales, marketing and business development. Since 2004, Bettencourt was with Vans, Inc., where he most recently served as vice president, product and marketing. He joined Vans as vice president, footwear and equipment. In his role, Bettencourt will serve as the senior leader for Sperry's global marketing and sales effort and is responsible for the development and execution of authentic marketing programs and new business initiatives that will support and amplify Sperry Top-Sider's global brand position as the nautical lifestyle brand dedicated those with a Passion for the Sea.  A key part of the role includes managing and expanding the brand's wholesale partner network and identifying new strategic opportunities to expand the brand in the global marketplace.  <>


Columbia Sportswear extends its e-commerce strategy into the mobile arena - After introducing its first e-commerce site last summer, outdoor sportswear manufacturer and retailer Columbia Sportswear Co. has launched a mobile commerce site built on the same on-demand technology platform from Demandware Inc. “We’ve gotten a great response already on our mobile site as well as on our e-commerce site,” says Paul Zaengle, senior director of e-commerce for Columbia Sportswear. “Traffic on both sites is growing dramatically.” Columbia quickly picked up on the demand among its customers for a mobile site soon after launching last August, as tens of thousands of customers per week accessed the new e-commerce site through their mobile phones. “Mobile visitors were still in the low single digits in terms of percent of all visitors, but it was still a significant number of customers—and they weren’t getting a great shopping experience on our web site,” Zaengle says. <>


Planning a mobile ad campaign? Google says mobile search ads won’t be cheap - Following a fivefold increase in the number of Google searches conducted on mobile phones in the last two years, the leading search engine said this week that it expects mobile ad rates will surpass PC-based search ad rates. Speaking in a conference call with analysts Monday that was webcast on, Google Inc.’s engineering vice president Vic Gundotra noted that mobile search ad rates had grown “dramatically” in recent years and can be expected to continue growing until they surpass desktop search ads rates. At the same time, Google plans to aggressively develop mobile applications to support online ads as well as more useful mobile search results. omplementary technology developments like GPS location, for example, are helping Google to develop more relevant mobile ads, Gundotra said. For instance, Gundotra demonstrated during the webcast how consumers with GPS-capable mobile phones can touch a “Near Me Now” link on their phone screens, then touch a category like “Restaurants” to pull up a list of natural and paid-search listings featuring nearby eateries.

“Google has bet big on mobile,” he said. <>


Senate Bill Aims To Penalize Currency Manipulation - A group of 16 U.S. senators, including four Republicans, announced bipartisan legislation this week to penalize countries like China that undervalue their currency to artificially discount their exports.The Currency Exchange Rate Oversight Reform Act will require the U.S. Departments of Treasury and Commerce to take action to support American businesses and workers. The legislation includes provisions from Senator Stabenow's Currency Reform for Fair Trade Act, which she introduced last year. "Our workers are losing their jobs because countries like China continue to place artificial discounts of up to 40 percent on their products and then sell them here in Michigan at a cheaper price," said U.S. Senator Debbie Stabenow (D-MI). "This unfair practice puts our manufacturers and businesses at an extreme disadvantage and costs us jobs. That's why I have joined with my Democratic and Republican colleagues to introduce this bill to require the Departments of Treasury and Commerce to take action and stop these countries from cheating." <>


FedEx sees economic recovery spreading - FedEx says the global economic recovery is broadening, as the U.S. economy gains steam and Asia continues to show strong growth. For the U.S., FedEx confirmed what economists have been saying and what government reports have been showing: Manufacturing is leading a slow economic recovery while consumers are keeping purse strings tight. Last month, U.S. industrial production grew more than expected and the services sector accelerated at the fastest clip in more than two years. But consistently high unemployment and stagnant pay have so far held off any surge in consumer spending. For FedEx, the company is expanding service in Asia to capitalize on growth there. In the U.S., it's pursuing more commercial business because that's where the growth is at the moment. The adjustments, along with huge cost reductions, are paying off. On Thursday the Memphis, Tenn., shipping company reported its first year-over-year profit increase in five quarters. FedEx also raised its earnings forecast for the fiscal year ending in May, seeing "a continued modest recovery in the global economy." FedEx, considered an economic bellwether because of the variety of products it ships for businesses and consumers, said Thursday it earned $239 million in the three months ended in February compared with $97 million a year earlier. Revenue rose 7 percent to $8.70 billion. The results exceeded Wall Street expectations. <

US STRATEGY - Quadruple Witching

Yesterday the S&P 500 finished flat on the day, while volume declined 9.5% day-over-day and the breadth was down -1690 to -472. Looking at yesterday’s MACRO data points, the market was able to shrug off bad news and focus on the good. 

  • Jobless claims for the week ending March 13th were 457,000 vs. consensus 455,000 and prior week unrevised 462,000; the 4-week moving average was 471,300 down 4,300 from prior week. 
  • February CPI 0.0% vs. consensus +0.1% and January unrevised +0.2%; ex-Food & Energy +0.1% vs. consensus +0.1% and January unrevised (0.1%).
  • Q4 current account balance was ($115.6B) vs. consensus ($119.0B) and Q3 revised to ($102.3B) from ($108.0B).
  • February leading indicators came in at +0.1% vs. consensus +0.1% and January unrevised +0.3%.
  • March Philadelphia Fed was 18.9 vs. consensus 18.0 and February 17.6.

While we continue to believe that the CPI and PPI numbers are inflationary, the March numbers will tell a different story from February.  A short-lived dip in February energy prices has been followed by higher prices in March, thus the CPI and PPI should show fairly strong gains when the March data is reported, as compared to February’s “contained” inflation reading. 


Yesterday, Healthcare (XLV) was the best performing sector in the market next to Industrials (XLI), as we sold our LONG position in the XLV.   We bought Healthcare (XLV) and the fear of unknown legislation and now we sold into strength.  The HMOs were a clear standout in the group, with the HMO index up 3.1% on the day.  


The Dollar index was up 0.74% on the day; the third best daily performance of the year. The strength in the dollar knocked down the REFLATION trade and related sectors.  Yesterday the three worst performing sectors were Energy (XLE), Materials (XLB) and Financials (XLF).   


Along with the XLV the markets were able to find support in the Industrials (XLI).  Air Freight and logistics names found some support from FDX +3.2%, as its earnings and guidance provided a sign of further strength in the economy.  Along with FDX, UPS and BA were the three best performing stocks in the XLI. 


Volatility (VIX) declined 1.7% yesterday and is now down 5 of the last six days.  The VIX continues to be broken on all three durations - TRADE, TREND and TAIL. 


Yesterday, Technology (XLK) was the 3rd best performing sector despite the SOX declining 0.7% on the day. 


As we wake up today, Equity futures are trading flat. As we look at today’s set up the range for the S&P 500 is 19 points or 1.3% (1,151) downside and 0.3% (1,170) upside.


In early trading, equity futures are trading marginally above fair value, continuing the recent rally ahead of today's "quadruple witching" and as Greece related noise continues to linger.  The US MACRO calendar is void of any significant events. 


In early trading, copper is trading higher on no real news flow, Gold is trading lower, and Oil is trading slightly lower for the second day in a row. 


Howard Penney

Managing Director

Debt Is Good?

“I do not expect any major nations to default on their debt.”

- Robert Rubin, Former Secretary of the Treasury, March 2009, Yale Law School


This is a quote we have highlighted a few times in the last year. We have it in our slide deck for the conference call that we will be hosting at 11AM: “Where Does The Sovereign Debt Cycle End?” (If you are interested in listening, email ). We use this quote to remind investors that the almighty ones at Groupthink Inc. have a serious problem in forecasting global macro risk.


Whether it is Robert Rubin, Larry Summers, Hank Paulson or now Timmy Geithner, it’s critical to understand that these gentlemen all come from the same place - Goldman and/or the Government. In sharp contrast to proactively preparing America for future risks, their claims to fame often surround solving crises that they helped create.


We realize that Summers didn’t work at Goldman. We also acknowledge that if he did, and he put GS into the derivative positions he put the Harvard Endowment into, he probably wouldn’t have worked there for long. As for Timmy, well… he’s not a P&L guy, so we aren’t certain he will be hired by Goldman when this is all said and done, but he should definitely apply to their derivative sales group if he wants a legitimate shot.


What all of these gentlemen have in common is an ideology that Debt Is Good. Now, politically speaking, it’s not palatable for them to admit this, but we will show you in a tight slide presentation that you should watch what they have done to America’s balance sheet, as opposed to what they’ve been telling you they were doing.


Away from the shell game of issuing more US Treasury debt than maybe even God himself could, the latest bailout game that Geithner is playing with America’s future is through what politicians are affectionately referring to as “Build America Bonds”, or BABs.


Now Geithner and Schumer are more focused on calling the Chinese manipulators than focusing your attention on this, but that doesn’t mean that State Treasuries aren’t levering this country right up like the Greeks did (Greek stocks are down -4.8% this week, fyi).


When asked about debt-laden California’s plan to issue BAB’s, Tom Dresslar (a spokesman for the CA Treasurer Bill Lockyer), told Bloomberg, “we plan to go full speed ahead with our BABs.” Nice. Lever this pig right up boys!


Now CA can call them BAB’s and Geithner can call these something about “Building America”, we call these Domestic Pigs. We’ll go through the numbers and the historical context of US State and Sovereign Debt on our conference call, but the reality is that California has already issued $8.1B of these Piggy Banker Bonds, and have every intention on issuing as much as the US government will let them.


The US Treasury is so busy fear-mongering you into believing that they are “saving you from the unknown”, that they often fail to mention the knowns. The US Treasury subsidizes municipal debt! New York City just issued $644M yesterday. This puts the US Municipal Debt market over the $2.8 TRILLION DOLLAR mark! They are feeding the pig and it’s growing. Building America? Yeah… one more debt at a time.


Again, from a politician’s perspective, Debt Is Good (we are working on a makeover for a Geithner Gekko). Think about why this is so - it’s not that complicated. Debt is a future obligation. Most of these cats don’t plan on sticking around Washington for your future.


The Federal Reserve’s Vice Chairman, Donald Kohn, has recently announced that he is resigning from the Fed. This week, the Fed’s balance sheet grew by another $26 Billion (week-over-week), taking it to a new record high of $2.31 TRILLION Dollars. If you didn’t know he wasn’t planning on seeing his Building America’s Liabilities through, now you know… Kohn has sat on the Fed’s Board since, you guessed it, 2002.


While it’s getting hard to keep track of all this American Debt (Bernanke was asked by the House Financial Services Committee this week if $5 TRILLION in GSE Debt was US Sovereign Debt. His answer: “I don’t know”), the team at Hedgeye Risk Management can tell you this: it will not end well. Across 8 centuries of economic realities, it never has. And never, is a long time.


My immediate term support and resistance lines for the SP500 are now 1151 and 1170, respectively.


Best of luck out there today,





VXX – iPath S&P 500 VIX — With the VIX down -38% since the SP500 bottomed -10.2% lower on February 8th, now (3/17/10) is a good time to buy some volatility for the immediate term TRADE as it is oversold.


USO – United States Oil — Despite a sharp correction in oil prices on 3/15/10, the price of WTIC oil remains in a bullish intermediate term position with TREND line support at $77.39/barrel. Buying on red.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

CYB - WisdomTree Dreyfus Chinese Yuan —The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



HYG – iShares High Yield Corporate BondSuffice to say, we aren't yield chasers with High Yield priced up here. There is a big difference between high-grade and high-yield; some hopefully learned this lesson back in 2007. We shorted HYG on 3/17/10.


XLP – SPDR Consumer StaplesConsumer Staples was the best performing sector on 3/15/10 in our S&P Sector Model and was immediate term overbought.


SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10 and 3/17.


EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We added to our short position for a TRADE on 3/5 and 3/17 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10, we shorted IWM and added to the position on 3/2 and 3/17.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


CCL had very little inventory left to sell at the time of their last call and incremental data points have been generally been positive. FX may provide the only negative commentary. 



  • “Turning to 2010 outlook…cruise costs per available lower berth day for the full year, again excluding fuel and in local currency, are projected to be down 1% to 2%. The decline is driven by tight cost controls and lower dry dock cost.”
  • “Furthermore, the dollar has weakened versus the euro and sterling, so in the end, fuel and currency are driving up our costs, and therefore, in current dollars and including fuel, our costs are expected to be up 4% to 6%. While the FX rate movement increases our cost, it also increases our revenue. So given these rates, the year-over-year profit improvement from currency is expected to be an increase of $60 million or $0.08 per share.”
    • Since 12/18, when CCL last issued currency guidance, the dollar has strengthened against both the Euro and the GBP by 4.7% and 5.9%, respectively. Therefore, at current rates, we expect that currency will have no revenue or EPS benefit.
  • “We expect to drive top-line revenue growth of approximately 10% for 2010, with the 7.7% increase I referred to before in our fleet-wide capacity, together with the increase in forecast of current dollar revenue yields of 2% to 3%.”
  • “On a fleet-wide basis for the first quarter, occupancies are at same levels as last year, slightly higher for North American brands and slightly lower for Europe brands. Although the slightly lower occupancy for Europe is not surprising, given the 15% capacity expansion for the European brands in the quarter. At this point, we have very little inventory left to sell in North America and in Europe.
    • “Currently, pricing for North American branded Caribbean cruises is moderately lower than last year, with pricing for Mexican cruises down more significantly than the prior year. Pricing for long and exotic cruises have strengthened during the last quarter and is now only slightly lower than the year-ago pricing.”
    • “By the time the first quarter closes, we expect European brand local currency fleet-wide pricing to be 3% or 4% lower than a year ago to slightly higher on a current dollar basis.”  
  • “On a fleet-wide basis, we are forecasting yields in the second quarter to be slightly higher on a local currency basis, and we're significantly higher on a current dollar basis.”
    • “Given the continuing strength of bookings, we are forecasting that North American brand revenue yields will be higher in the second quarter on year-ago levels.”
    • “Given the strength of European booking volumes, we expect the pricing gaps to narrow, and by the time the second quarter closes, we expect Europe brand pricing, on a local-currency basis, to be at approximately the same levels as last year and on a current dollar basis, up significantly from last year.”
  • “Early indications for the third quarter booking trends are encouraging. Overall, occupancies in the third quarter are running slightly ahead of last year, with North American slightly stronger than Europe.”



  • “With continued strength and booking patterns during the last 13 weeks, occupancies on a capacity adjusted basis for the first nine months of 2010 are now at approximately the same levels as last year. Booking volumes during this past quarter for North American and European brands covering the first three quarters of 2010 are each up over 40% versus the easier comparisons to last year. But these bookings are also strong on an absolute basis. Actually, on absolute basis, these are the strongest bookings we have seen in our history.”
  • “Pricing for cruises still have not recovered as much as we would like, and perhaps, that's a reflection of the currently uncertain economic picture for 2010. Still, in selected areas of the business, we have seen more demand and have been able to move pricing higher in certain trades.”
  • “Our U.S. premium brands are showing increasing pricing strength, which is a significant reversal from 2009. This also suggests that with the strengthening of the U.S. economy and the rise in the equity markets that the higher-end customer is feeling better about taking their vacations, and the superior value of cruise vacations is driving a lot of business our way.”
  • Q: “The 2010 cost outlook, can you just tell us what that would be before the easy comp, the dry docking easy comp?”
    • “It will be relatively flat, excluding the dry dock -- the reduction in dry docking.”
    • “The decrease is, yes. It's surely the dry docking, and the tight cost controls allowed us to keep it flat for the year.”
  • “Honestly, we're not seeing any impact from Oasis.”
  • “Premium brands being booked stronger and the ability to raise pricing on premium brand bookings…continued through the fourth quarter.”
  • “Everywhere is doing better with two glaring exceptions: The Mexican Riviera and Brazil. Other than that, I think, generally, Caribbean, Europe, Australia, Asia, they're all doing a little bit better.”
  • Q: “And in your earnings estimate for this year, are you planning to have onboard spend up, down or sideways vis-à-vis '09?”
    • “basically flat”



  • “Wave season's off to a strong start with good volume and even higher pricing. While we are also not seeing a dramatic run-up in pricing, our numbers demonstrate a slow but steady improvement in our revenue environment, consistent with a slow but steady improvement in the economy.”
  • “Each of the last three weeks have generated record booking volumes for us at pricing that is running ahead of the same time last year. Clearly, we are not back to pre-recession demand levesl, but we are pleased to see yield recovery underway. As of today, our booked load factor and average net per diem are ahead of the same time last year for all four quarters and the full year.”
  • We are experiencing clear signs of recovery in our order book. In fact, since September, our booking volumes have been running more than 30% higher than during the same period a year ago. This acceleration of booking volume has also begun to have a positive effect on pricing.”
  • “While our current price levels are still being influenced by the weak economy, we are clearly in a better position to control discounting and even take some measured price increases.”
  • “I think the general theme is that our cost on a reported basis will be flat to slightly up. And when you factor in base exchange rates, it'll actually be flat to slightly down next year.”
  • “Assumptions on ticket revenue recoveries and perhaps on onboard.”
  • “I think my comment on booking windows overall was it's probably had a slight amount of expansion. It really varies significantly by market. I think some of the premium itineraries such as Europe and Alaska were seeing the booking window move out from where it was a year ago. But Adam alluded to the West Coast specifically, Mexican Riviera, I think we're seeing a more contracted booking curve there. When you net it all out, I'd say the booking curves just slightly up from where it was. But certainly not back to where it was before the recession.”
  • “Richard alluded to, as that we come out of 2010, we're looking forward to a revenue environment where we don't have a lot of business on the books that was booked in '09. We have a disproportionate amount of that first quarter having '09 sales. I just reiterate our view of Q1 has not materially changed.”


DRI is scheduled to report fiscal 3Q10 earnings after the close next Tuesday.   I am not expecting too many surprises out of the quarter as the company preannounced better than expected sales and earnings prior to its February analyst day.  According to management’s revised guidance, it is going to be a good quarter with same-store sales improving on a 2-year average basis across each concept (with the biggest sequential improvement coming at LongHorn) and EBIT margins moving about 80 bps higher YOY.  I am modeling $0.93 earnings per share for the quarter at the high end of the company’s revised guidance and $0.01 above the street’s estimate.


Investors are already anticipating a strong quarter, however, as the stock moved nearly 4% higher on the day the company preannounced fiscal 3Q10 numbers and raised its full-year EPS guidance to +5% to +8% (from its prior flat to +4% range).  Specifically, management stated, “The signs of sales and traffic improvement we began to see late in the second quarter and discussed during our December conference call with investors continued into January and February.”  DRI has moved about 12% higher since the day prior to that announcement. 


What will matter more next week is what DRI has to say about current trends in early fiscal 4Q10.  Even if the industry continues to experience sequentially better trends, DRI’s 4Q same-store sales trends will likely not look as good as 3Q because the company benefited by about  80 bps in the third quarter from a holiday shift.  This benefit will go away in the fourth quarter and the company is lapping more difficult comparisons, particularly at Red Lobster (due to the earlier Lent this year, which helped 3Q10 and will hurt 4Q10).  EBIT margin comparisons get more difficult in the fourth quarter as well and into 1Q11. 


That being said, DRI looks to be in a good position for fiscal 2011.  If top-line trends continue to improve sequentially (this is obviously a big ‘if” but I am only assuming a moderate improvement), FY11 EBIT margin should move close to 50 bps higher, even considering a somewhat tougher commodity environment.  DRI guided to flat to +0.8% food and beverage inflation in fiscal 2011. 


Capital spending is expected to increase about 10% in FY11 as the company accelerates both its unit growth to about 4% from 3% in FY10 and its remodel initiatives at LongHorn and Red Lobster.  Through a combination of new units and remodels, 100% of the company’s LongHorn units will reflect the Ranch House look by the end of fiscal 2012 and 100% of its Red Lobster units will be in the Bar Harbor image by the end of fiscal 2014.  In FY11, nearly 20% of DRI’s capital spending is expected to be allocated to remodels, up from about 10% in FY10.  Additionally, the level of spending on remodels will remain elevated through FY14 as the company plans to accelerate its more expensive Red Lobster remodels as it winds down on the LongHorn reimages. 






Even with capital spending moving higher, DRI’s return on incremental invested capital looks to be moving higher in FY11.  DRI’s ROIIC has been coming down since fiscal 2007 but moved significantly lower in 2009 and 2010.  We won’t see an immediate return to the mid-to-high teen ranges of fiscal 2005 and 2006, but a double-digit number seems likely in fiscal 2011.  As I have said numerous times before, a stock’s performance will often follow the trajectory of returns.  And, I don’t think my numbers fully reflect the higher return associated with the bigger portion of capital spending going to remodels, which typically yield higher immediate returns.  Management guided to a 3% to 4% traffic lift from remodels at LongHorn and a 4% to 5% boost at Red Lobster.






DRI’s strong free cash flow will remain intact with capital spending moving higher as well.  DRI guided to $50 to $60 million in share repurchases in the back half of fiscal 2010, despite the fact the company has about $150 million in debt coming due.  Share repurchases are likely to move higher in FY11 as the company maintains its dividend and pays down another $75 million in debt (due in April 2011).


Howard Penney

Managing Director



DRI EBIT margins:




 The 50-65 yrs cohort is important for DRI:






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