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We’ve got some takeaways from Singapore. The good:  busy and decent table win, the less good: expensive busing may be playing a role.



Resorts World Sentosa (RWS) has been open for more than a month.  The initial read we got from our consultant this weekend was positive with a caveat.  Mass revenue per table per day looks good at between US$3,600 and US$5,300, which compares favorably to the Mass average in Macau at US$3,600.  While this should not be too surprising since RWS is operating a monopoly, a busy casino cannot be considered a bad thing.  The only thing tempering that enthusiasm is that we are hearing that the property is operating an aggressive busing from Malaysia – no doubt impacting its Highlands property - which is expensive and highly promotional.


Here are some observations: 


RWS Details:

  • Opened 2/14/10
  • 380 Mass tables, 120 VIP tables, 1,100 slots (only 850 appear operational)
  • Budget of US$5bn, up from US$3.4bn
  • Locals have to pay entry fee of S$100 per day or S$2,000 per annum
  • Foreigners pay no fee


Customer Base:

  • Visitor traffic predominately Malaysian
  • Tapping into current Highlands customer base in Malaysia
  • Aggressive and expensive busing from Malaysia
  • Local play builds beginning late afternoon



  • Roulette (20% of Mass floor) much bigger than Las Vegas or Macau
  • Baccarat only 23% of Mass floor
  • Slots more popular than Macau
  • Peak time for Mass floor is late afternoon
  • Only 250 of the 380 Mass tables are open at peak – lack of staff may be the problem
  • Due to inexperience, game speeds are very slow
  • Minimum bets are averaging around S$50
  • Win per Mass table estimated to be S$5,000-7,500 per day


As Keith alluded to in today’s Early Look, the sad part about playing this game every day is the shameless use of inside information by people trying to make money. 


We don’t have inside information but we think Mr. Macro Market is whispering in our ear.  The CRB Index and gold are breaking down from an intermediate term perspective for one reason: interest rates are heading higher. 


Last week there was a compression in our “Piggy Banker Spread”, especially with gains in the 2-year yield. The 2-year yield remains in a bullish formation* and typically when the Hedgeye model flashes a bullish formation we assume a high level of conviction on our call. 


Interest rates are going up globally!  Domestically, they are going up because we are a debtor nation and inflation is going to accelerate on a reported basis in March from February’s data.  Lastly, the dollar is in a bullish formation and last week hit at 3-week high, confirming the bullish formation on interest rates. 


From a MACRO perspective, that RHYMES because somebody knows something you don’t know.  Another thing that RHYMES today is that rumors create fear and bubbles that people are terrified of being short into!  Today’s speculation:


(1)    Pactiv (PTV) is trading higher in reaction to a rumor that it is an LBO candidate

(2)    Martin Marietta (MLM) is moving higher in reaction to rumor that private equity is interested in the company

(3)    SK Broadband rises most in eight months on merger speculation

(4)    Papandreou Says Talk of Greece Leaving Euro Zone a ‘Joke’


Shorting is difficult enough to do, never mind in a market so affected by ridiculous rumors.  Shorting due to valuation or a small earnings miss might not be worth the price of admission.  Stick with flawed business models. 


Have a great day,


Howard Penney

Managing Director


* Official definition (glossary on hedgeye.com):  A bullish formation occurs when the TRADE, TREND, and TAIL lines of support for a security's price sit below the current price, with the TRADE line closest to the current price and the TAIL line farthest below, with the TREND line in between. A Bullish Formation predicts a behavioral response by the market in which investors of different durations are driven by the price to conspire to drive the price higher through their mutually reinforcing investment activity.





Tidbits from our guy on the ground in Macau




  • Expectations are high for Wynn Encore both inside and outside the company
  • Wynn Macau is under roomed so Encore will be hugely additive
  • Details and timing on Wynn Cotai are scarce.  If there is any announcement it would be at the opening of Wynn Encore


  • Mass ramp continues at City of Dreams (CoD)
  • VIP is struggling at CoD - turnover less than Altira
  • Whispers are surfacing that CoD is pushing up commissions despite agreement with Venetian to hold rate


  • Sale of Four Seasons residences seem likely
  • Politics could complicate matters as Macau Chief Executive is under pressure to build more affordable housing
  • Real estate developers will not be happy if LVS is allowed to sell apartments on Cotai


This week we will be getting some incremental data points on the health of the casual dining space from DRI earnings on Tuesday and Brinker’s annual analyst meeting on Friday.  In both cases I expect the news flow to be positive. 


Over the past 90 days, casual dining stocks are up an average of 34.9% while quick service stocks are up 21.8% on average.  The outperformance is attributable to the data; consumer confidence trends are showing that consumers in higher income brackets have higher levels of confidence.  Additionally, a relative improvement in higher-end retail sales (Tiffany’s today and Nordstrom in February), as highlighted by our Retail team, has been observed recently.  Household income is also picking up disproportionately at the “high end of the income spectrum”, according to J.P. Morgan’s investor day (highlighted by financials sector head, Josh Steiner, on 2/25).  Management commentary from chains like PFCB also suggests that business expense expenditures may be picking up.


Coming into the summer months, the trends in top line sales will take on increased importance for overall stock price performance.  Casual dining, like quick-service, is facing some notable operating cost increases, on a year-over-year basis, particularly in the third quarter.  As seen in the chart below, declining food costs have been a significant tailwind for the industry in 2009.  The benefit from lower food costs began in earnest in 1Q10, but the favorability accelerated throughout the year peaking in 3Q09.  It’s impossible to make a blanket statement about every restaurant company and the impact of foods costs on the P&L, but it is helpful to look at a broader measure of food cost trends. 


Given that most companies contract out a year or more (in some cases) for 75% or more food costs, the timing of higher foods costs impact on the P&L is delayed by six months or more.  The broadest measure of overall food inflation, The CRB Foodstuffs Index, is trending upwards and is likely to remain at elevated levels for the next few quarters (currently at +15.7% YoY) given that 2Q09 saw a decline of -30% YoY for the Index.


Given the current trends, 3Q09 will be a very difficult quarter for the industry from a cost stand point, putting incremental pressure on the sales trends to continue to improve. 




Additionally, it’s not likely that labor costs will provide any tailwind for Casual Dining operators.  Unionization is not currently in the media’s crosshairs but it is probably going to be a focus of the current administration at some point in the next three years.  It is also worth considering the chart below; labor costs are growing at a steady rate on a two-year average basis.


CD – LOOKING AT THE TRENDS FOR 2010 - cd labor costs


EBIT margin trends, shown in the chart below, vividly illustrate the benefit of cost cutting and lower food costs that occurred through 2009.  As it stands now, it’s is not very clear where any margin tailwind will come from unless there is positive traffic trends and incremental pricing.  Labor cost trends are not promising and food costs look set to increase as a percentage of sales in the middle and second-half of next year.  As a point of reference, EBIT margins rose 110 bps in 3Q09 and 120bps in 4Q09; it will be difficult for the casual dining chains to match these levels of margin expansion. 


CD – LOOKING AT THE TRENDS FOR 2010 - cd ebit margin


Sales trends in casual dining are showing considerably more stabilization that in quick service restaurants.  We are hearing that February and March same-store sales results continue to improve on a sequential basis.  On a two-year average basis, sales trends in January improved by 380bps from December, to -3.2%.  The improvement is impressive despite the fact that unemployment, the increase in the savings rate, and inflationary consumer prices are all a potential drag on spending patterns.


It seems that, as PFCB management alluded to, an improvement in “expense account” spending could be helping trends at casual diners.   While consumer confidence among higher income brackets is currently providing a boost to casual dining, a reversal in the overall stock market could quickly change this.  Darden restaurants is reporting after the close Tuesday and I will be eager to hear what commentary, if any, they offer on current trends in early fiscal 4Q10.





Howard Penney

Managing Director

Being Japanese

We had our Sovereign Debt Conference call last week (email us if you want the slides), and highlighted that on a number of metrics, specifically debt-to-GDP and deficit-to-GDP, the United States has comparable ratios to the PIIGS.  In effect, the United States is a PIIG.


We have highlighted our concerns over growing debt issuance in the United State many times, and we are not alone in this regard.  According to our estimates debt issuance by the U.S. government grew by 24% in 2008 and 22% in 2009.  Currently, the United States has $12.6 trillion in debt on its balance sheet, with a debt-to-GDP ratio of 88% (this according to estimates at usdebtclock.org).  Our view is that too much debt is bad, and based on long term historical studies, we are nearing that “too much” level.


Those who support increasing levels sovereign debt levels in the United States, point to Japan.  The Japanese currently have a debt-to-GDP ratio of almost 200%, and, as the narrative fallacy goes, they are fine.  This higher debt ratio is cool because most of it is owned domestically by the government (about half) and 95% of the remainder is owned by Japanese citizens, so foreign investors have very little sway.  In addition, Japan has very low interest rates, and its overall cost of servicing debt is 1.3%. All good, right? Being Japanese is cool?


Now certainly, these are facts, and facts are good, but the question remains: Do we want to become like the Japanese?  This is certainly not a bigoted point, and I for one absolutely love Sushi, but one look at a long term chart of the Nikkei 225 over the past thirty years, and we get our answer.  This major Japanese stock index has done nothing but go straight down for the last 20+ years.  So, while the country hasn’t defaulted and her interest rates are low, Being Japanese, is not all it is cut out to be.


Obviously the primary issue in Japan is long term deflation, and our view is that the opposite will likely occur in the U.S., at least in the short term, which is inflation.  The point is, though, as the counter argument goes, if we are wrong on inflation, then maybe all this debt isn’t so bad.  It probably isn’t bad if you don’t mind two decades of lower highs in your stock market. 


Daryl G. Jones

Managing Director


Being Japanese - nikkei


R3: China Banter Matters To Retail


March 22, 2010


There are several unrelated items out this morning on China that ultimately have implications for both the US consumer, and segments of the retail supply chain. They might not immediately matter to today’s results in your ‘space.’ But we need to manage tail risk.





First, how can we not hit on Google. Even if Google is ‘not in your coverage space,’ you absolutely must track the implications on the Macro landscape. Per Allison Kaptur on the Hedgeye Tech team…


China is nobody’s fool.  Over the weekend, Chinese state-run media sources played up connections between Google and the U.S. government, including accusations that Google feeds search data to the CIA.  They’re reframing the debate on their own terms: from (Western) freedom versus censorship to (Chinese) freedom versus American imperialism.  I think the quotes speak for themselves, and show exactly how Google’s slogan “Don’t be evil” is received.


From Xinhua: "Some Chinese Internet users who prefer to use Google still don't realize perhaps that due to the links between Google and the American intelligence services, search histories on Google will be kept and used by the American intelligence agencies." 


From the English language website of China Radio International: “Google's relations with the US government cannot be deeper. US media has said Google was the fourth-largest supporter of Barack Obama in his election campaign. Four of the company's former executives including Sumit Agarwal, who was the product manager for Google Mobile team and is currently deputy assistant secretary of defense, are now serving the US government.”


This is purely political, folks…


Second, check out the article on Bloomberg this morning (China Accuses U.S. of Politicizing Yuan as Trade Surplus Sinks). In effect China’s Commerce Minister Chen Deming said that pressure on China to strengthen the yuan does “no good to anyone.” Tensions over China’s currency are mounting, with President Obama facing increased calls from U.S. lawmakers to step up pressure on China for keeping its exchange rate artificially low. Chen yesterday warned that sanctions against China that amounted to protectionism would hinder growth and raise the risk of a “double dip recession.”


So in effect, political tensions continue to heat up, with little sign of a light at the end of the tunnel. We’re just a couple of moves away from the Mensa Society in Washington spurring Chinese retaliation that would start to meaningfully impact prices of goods coming into this country. In the end, we could have a situation where Consumers are being hit with uncontrollable inflation while China continues to dump Treasuries and drive rates higher. 


I understand that there are dozens of scenarios that could, and likely will, impact and likely complicate the simple setup here. But we need to manage around tail risk – especially given that few people seem to be putting 2 and 2 together here.




  • Ralph Lauren’s online fashion show for its Lauren line is the first to offer the consumer the option of actually purchasing the clothes worn on the runway- in real time. The virtual and e-commerce enabled fashion show also includes fashion commentary from four fashion editors. We wonder how long it is before other brands catch on and start showing and selling in-season merchandise simultaneously. 
  • Perry Ellis management noted that conservative planning on the part of most or their retail customers is resulting in low inventory levels at the current time. As a result, they are seeing increased sales that require faster replenishment and orders being pulled forward for earlier delivery. 
  • A study by Unica, a marketing technology provider, revealed that 84% of marketers expect to use at least one form of an Emerging Marketing Channel (rich media, mobile marketing, or social media) this year. As of now, social media is the most popular of the emerging channels with 47% of currently utilizing it for marketing purposes. Mobile marketing remains the least penetrated, with just about one-third of respondents using mobile advertising in 2009. 
  • According to Kantar Media, total advertising spend for 2009 was down 12.3% to $125.3 billion. However, there were just two subcategories that saw growth for the year, Internet up 7.3%, and FSI’s (Freestanding Inserts) up 3%. Newspapers and radio were hit the hardest, with declines in advertising revenues of 20% for each. 




Nike and UCF Agree to Footwear and Apparel Contract - In the wake of having is footwear and apparel contract with Adidas terminated after freshman men’s basketball player Marcus Jordan, the son of hall of famer Michael Jordan, refused to wear team issued footwear in favor of his father’s Air Jordans, UCF has reached a five-year agreement with Nike to provide all Golden Knight athletic teams with footwear and apparel, according to a report in the Orlando Sentinel. "We had explored a number of different options with a number of different manufacturers and equipment providers, and ultimately we have reached an agreement with Nike," said UCF Executive Associate Athletic Director, David Chambers. As the university’s exclusive contract with Adidas will expire on June 30, its deal with Nike will commence on July 1. UCF was rumored to also have engaged in talks with Russell Athletic and Under Armour while seeking a new provider for its athletic program. Officials from Nike are expected to visit with UCF administrators next week to assess the full needs of the athletic department and have assured the school that it will be provided with all necessary equipment in time for the beginning of the fall sports season. Providing new uniform designs for each sport is expected to be one of the first goals for Nike. <sportsonesource.com>


Polo, North Face Fight Online Fakes - Polo and The North Face are on the warpath against counterfeits.  In what legal observers say is the largest case of its kind, Polo Ralph Lauren Corp. and VF Corp.’s The North Face brand have used a federal lawsuit to strike at a large network of more than 130 Chinese Web sites selling counterfeit goods to U.S. customers through up to 6,500 domain names. According to court documents unsealed this week, the two apparel firms’ own investigations recently uncovered a ring of related Web sites that, since January 2008, have moved as much as $780,000 a month in fake Polo and North Face goods at domains such as polo4sale.com and outletnorthface.com. While Polo and The North Face are the only two plaintiffs in the case, the accused counterfeiters also offered goods from a varied list of brands including Dior, Ed Hardy, Coach, Gucci, Paul Smith and Abercrombie & Fitch. Such cybersquatting enterprises have gained in favor among counterfeit sellers in recent years for their comparatively low-risk level and relative anonymity. But in their joint suit, filed March 1 in U.S. District Court in Manhattan, Polo and The North Face say the domain names are largely traceable to the operators of one Web site, B2BSharing.com, and an affiliate program it uses to help other parties sell counterfeit wares. Lawyers for the firms wrote the operation is “of a size and scale they have not seen before.” <wwd.com>


Penney's and Olympic Gymnast Nastia Liukin Launch Girls' Line - J.C. Penney Co. Inc. and champion Olympic gymnast Nastia Liukin are going for the gold with a full lifestyle collection for girls ages eight to 12, called Supergirl by Nastia. The line, which will retail at between $20 and $38, hits stores July 20 for the back-to-school season. It includes knit dresses with detachable necklaces, tunics, tops, pants and leggings, as well as a dance and fleece activewear collection. For Penney’s, it also represents a re-entry into the girls’ activewear category. Supergirl by Nastia is a three-year exclusive partnership among the retailer, Liukin and Warner Bros. Consumer Products, which owns the Superhero property. It will take up prominent real estate in Penney’s girls’ and activewear departments, with placement by the aisles, as well as a hot spot in the center of the department showcasing looks and images of Liukin. “We’ve seen a big trend towards activewear in our boys’ department, and this is a natural complement to that — an ‘actionista’ collection with a real style quotient,” said Clark McNaught, Penney’s senior vice president and general merchandise manager for children’s apparel. “We’re not slapping a shield on a T-shirt. We’re trying to make it more relevant to what’s happening in the market.” <wwd.com>


VF's Wiseman Sees Pay Drop 9.3% - VF Corp. chief executive officer Eric Wiseman’s pay contracted 9.3 percent last year, to $7.2 million, as a higher salary and nonequity incentive plan compensation were unable to offset the loss of a bonus and a decline in stock and option awards. Wiseman, chairman, president and ceo of the Greensboro, N.C.-based apparel powerhouse, saw his salary move up to $1.04 million from $950,000 and incentive plan earnings rise to $1.15 million from just less than $119,000 in 2008. But he received no bonus, versus a $641,250 payment in 2008, and his stock and option awards fell 27 percent to $4.2 million from $5.7 million in the prior year. Because of vesting schedules and fluctuating stock prices, stock and option awards weren’t necessarily realized but are reported when public companies submit their definitive proxies to the Securities and Exchange Commission, as VF did on Friday. Wiseman earned a total of $8 million in 2008 and $4.9 million in 2007. President of the firm since 2006, he became ceo in January 2008 and chairman seven months later. <wwd.com>


Sears spends $140,000 on lobbying - Department store chain Sears Holdings Corp., operator of Kmart and Sears, Roebuck and Co., spent $140,000 on lobbying in the fourth quarter on credit card reform legislation and other issues, according to a recent disclosure form. That was less than the $180,000 the company spent in the third quarter of 2009 but twice the amount it spent in the fourth quarter of 2008. Sears also lobbied on legislation involving pension funding, according to the report it filed Jan. 20 with the House's clerk's office covering October through December. One of the highest-profile issues Sears monitored was the Credit CARD act, now a law, which is meant to give credit card users more information and stop policies that many consider abusive. <businessweek.com>


New Look gears up for fresh IPO bid - The fashion retailer New Look could resurrect its £1.7bn flotation plans this week when its board meets to consider if market conditions have improved sufficiently since the deal was postponed last month. Executives at the group, owned by private equity firms Apax and Premira, are set to meet on Tuesday to consider the move. Any listing could come as early as June, just five months after the IPO failed to gain traction with investors for a second time in three years. The deal was pulled, along with those for the ticketing business Travelport and Legoland owner Merlin Entertainments, after only lukewarm support from investors. Since the plans were shelved, some deals have been successful, giving the New Look's owners renewed confidence. New Look shelved its planned IPO blaming volatile markets. The group, which has debts of £1.1bn stemming from its leveraged buyout, insisted that decision was a postponement rather than a cancellation. Similarly, Travelport and Merlin, which are also heavily indebted after private equity buyouts, respectively shelved £1.2bn and £2bn listing plans. <independent.co.uk>


Samuelsohn Sold to Grano Retail Investment - Samuelsohn Ltd., the Montreal-based tailored clothing brand, has been sold to Grano Retail Investments, an investment and advisory company headed by Stephen Granovsky. Terms were not disclosed, but financing was provided by BDC, Canada’s business development bank. Granovsky, Grano’s founder and chief executive officer, will become ceo of Samuelsohn, an 87-year-old family-owned business. Twin brothers Michael and Richard Samuelsohn, grandsons of the founder, will exit the company. Grano’s plan is to significantly enhance the visibility of the business, expand distribution and add product classifications. The firm produces private label suits for Paul Stuart and Harry Rosen and sells its own Samuelsohn-label goods to 250 upscale specialty stores in the U.S. and Canada.  <wwd.com>


Bigger Bra Sizes Bolster Sales - Bra sizes in the U.S. are larger than ever as manufacturers and retailers try to accommodate the rising number of full-figure women. The median size a decade ago was 36C. Now there is demand for DD, DDD and G cups, and bra makers are reaching even higher with a K cup. The business impact of full-figure bras and related undergarments is substantial. Retail sales of full-figure bras from 2008 to 2009 rose 3.3 percent, to $2.15 billion, and the number of bras sold in the category gained 7.4 percent to 158.8 million units, according to research firm NPD Group. Overall sales of bras last year increased 1.1 percent and accounted for $5.8 billion of the total $10.67 billion innerwear business. Several factors are turning a traditional niche area into a flourishing category. The obesity epidemic has generated a base of consumers that is demanding a wider choice of basic, fashion and specialty product. Oprah Winfrey, whose power to make a bestseller, spawn trends and influence public opinion is unrivaled, introduced Bra Fit Interventions, explaining proper fitting, to millions of viewers on her television show. She feels so strongly about the subject that Bra Fit Tips for full figures are featured on oprah.com with the tagline, “Ladies, Rise to the Occasion.” <wwd.com>


PayPal forges an alliance with China’s largest payment card network - PayPal has struck a deal with China’s largest domestic payment card network, China UnionPay, that will enable billions of Chinese consumers to buy goods online from foreign merchants. PayPal also says it will double its Asia-Pacific workforce to 2,000 by year’s end. Chinese consumers hold 2.1 billion UnionPay cards, most of which are debit cards, according to PayPal and figures from the state-backed UnionPay. Consumers with UnionPay cards will be able to initiate PayPal transactions in the third quarter, says PayPal, the online payment processing service owned by eBay Inc. The partnership is designed to make it easier for Chinese consumers to make cross-border transactions. “PayPal’s partnership with China UnionPay removes an important friction point that exists across borders,” says Scott Thompson, PayPal president. “We are thrilled to eliminate the payments barrier so merchants can welcome millions of new Chinese customers to their sites.” PayPal says it has 81 million active accounts across the world. PayPal in China will face competition from Alipay, the online payment service operated by China-based e-commerce firm Alibaba Group, in which Yahoo in 2005 bought a 39% stake. Alipay says it has 300 million registered users. Alibaba also operates a consumer auction site, Taobao.com, which analysts have estimated controls up to 9 <internetretailer.com>


Dollar Stores, Fast Food to Add Space in 2010, Colliers Says - Dollar General Corp., Saks Inc.’s Off 5th and Chipotle Mexican Grill Inc. are among the discounters and fast-food chains set to expand in 2010 as U.S. consumers embrace a “new frugality,” according to commercial property broker Colliers International. Low-cost restaurants and retailers, including Papa John’s International Inc.and TJX Cos., are planning to add stores following the loss of more than 4 million U.S. jobs last year and a reduction in consumer spending, Boston-based Colliers said today in its 2010 “Retail Trends & Opportunities” report. “The ‘New Frugality’ is here for at least five years,” Garrick Brown, national retail research director for Colliers, said in the report. “Necessity and off-price retailers will continue to fare best.” Last year’s rise in unemployment, which followed a loss of 3.1 million jobs in 2008, hurt retailers and their landlords as consumers curtailed spending. The National Retail Federation predicts that retail sales, excluding automobiles, gas stations and restaurants, will increase 2.5 percent this year following a 2.5 percent drop last year. Job losses likely will bottom out this quarter, Colliers said. The bankruptcies of Circuit City Stores Inc., Linens ‘n Things Inc. and Gottschalks Inc. in 2008 and 2009 contributed to rising retail vacancies across the U.S., sending rents down 25 to 40 percent, depending on the market, Colliers said. Lower rents have been “a huge factor” in the expansion of Dollar Tree Inc.; TJX’s T.J. Maxx and Marshalls stores; and Ross Stores Inc.’s Ross Dress for Less chain, Colliers said. <bloomberg.com

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