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LVS: GRAND SLAM IN MACAU

LVS may have struck out in Las Vegas in Q2 and higher corporate expense is never a hit. However, these issues shouldn’t overshadow some home run trends at Venetian Macau. Adjusted Q2 property EBITDAR of $140.2 million exceeded expectations. More importantly, the trend is higher. The property should generate its highest VIP volume this month since November. On the mass market side, July should exhibit the best gaming volume month ever at the property. The data confirms our 7/24/08 call that foot traffic at The Venetian Macau picked up considerably in July. What’s driving the improvement? On the VIP side, higher junket commission rates and more direct marketing and credit have been the key drivers. Within the mass market, the ramp up of LVS’s ferry service appears to be the main catalyst. The following chart shows the number of ferry passengers carried daily by LVS to the Cotai Strip. The trends are obviously encouraging and have driven visitation to The Venetian up 28% in July. I remain very cautious on Las Vegas and some aspects of the Macau market, but with a huge short interest, LVS’s stock could continue to drive in some runs over the near term.

SBUX – SO BAD IT’S GOOD

U.S. same-store sales decelerated from 2Q and were down mid single digits in 3Q. Traffic trends remained weak. The company experienced traffic declines in the U.K. and slower sales momentum in Canada. Importantly, the reduction in new store openings and closure of underperforming stores will mitigate these trends in fiscal 2009.

CEO Howard Schultz said they are seeing signs now in the U.K. that emerged in the U.S. in the beginning of the year as it relates to consumer spending. He also said that the “very, very tough economy” in Spain has caused management to alter its growth plans because they don’t want to expand when consumers are under a lot of pressure. Management commented that they are facing significant challenges during the afternoon day part. They see the current economy as a tremendous headwind that has prevented them from moving the needle on improving traffic and the environment has proven more difficult than they anticipated back in January.

  • So how is this good? Starbucks had grown accustomed to 20%-plus revenue growth and 5%-plus same-store sales growth results. Three consecutive quarters of negative comparable sales and traffic, 9% sales growth and about 500 bps of U.S. margin compression in 3Q has forced management to make real changes.
  • U.S. company-operated store unit growth had been in the 13%-19% range YOY, and now management is forecasting a negative 60 net new stores in FY09 as the announced store closures will exceed store openings. Capital Expenditures as a percent of sales have been moving up rather significantly, from 7.8% in 2004 to 11.5% in 2007, despite declining returns. Based on the company’s revised guidance, however, capital expenditures are expected to be $1 billion in FY08 and $750 million in FY09, a 7% and 30% decline, respectively from 2007. This more disciplined spending will generate incremental free cash flow and yield better returns for shareholders. To that point, it was encouraging to learn that the company is seeing incremental sales at the stores that are in proximity of the 50 stores that have already been closed.

    The company also lowered its international unit growth targets to 825 net new stores in FY08 (from prior guidance of 975) and 900 net new stores in FY09 (from 1,050). Management said they are taking “learnings from [their] U.S. market experience and approaching international growth with cautious optimism, given the current environment.”

  • Relative to overall traffic declines, management indicated that it is seeing an uptick in afternoon traffic as a result of its Vivanno and Sorbetto beverage launches, which they highlighted as an incremental positive as afternoon traffic “has been the burden for the past six months or so or even more than that.”

    Mr. Schultz reiterated that there is “no silver bullet” and that he cannot predict the economy, but that they are managing the things they can control. That being said, I remain convinced as Mr. Schultz said, “Starbucks is going to win.”


85% Cash

The second time is a charm here - if you are net long the US market that is. This is our second test of the high end of my S&P 500 “Trade” range in the last two weeks. The first of course was the 88 point, +7.3%, S&P 500 rally from the oversold 1201 intraday print on July 14th – the latest was a 50 point, +4.1%, move in the last 48 hours. Positive short term “Trade” momentum in the US Dollar, US small caps, and anything with high short interest has appreciably improved.

Fortunately, I’ve been running net long. That said, I have been nervous about being net long the whole way up! I am not going to stick around and wait for a third rally. I will not regret saying that I missed it, if it occurs. In the last 2 weeks I have moved to 85% cash. I think patience in the next 2 weeks will pay. There is going to be too much pin action into and out of tomorrow’s employment report for my liking. Sometimes doing nothing is the best decision I can make.

Could the S&P breakout for a shark bite squeeze if the US employment report is more bullish than I am expecting tomorrow? Definitely. Could the US financial system crash on any given trading day this summer? Definitely. For every short term bullish fact on my sheet, there’s an equally bearish intermediate one.

The question from here is one of duration. I’m more comfortable taking a step back so that I can see the next week of facts. I want to let this psychological fire breathe how it may. I’m having a great year so far, and the last thing I am going to do is put my hard earned capital at risk betting on an employment number or Ben Bernanke. What I think he should do at next week’s FOMC meeting, and what the political winds could force him to do, are two very different things.

I wrote a few intraday notes in the portal yesterday that speak to the bullish “Trade” case from here. Volatility (measured by the VIX) and Oil under 21.52 and $127.46 respectively are bullish market factors driven by a US Dollar Index holding its head above the 72.69 line. Bernanke could support these emerging bullish macro factors if he raises interest rates, and breaks inflation’s back. He could also blow it up if he panders to the political winds and devalues the American currency again at game time.

The Fed extended its emergency lending facilities yesterday to January! In plain English, that means that “Helicopter Ben” will drop cheap money onto Wall Street for the foreseeable future. This is a cute, but more appropriate, nickname than any other for Bernanke until he stands up, provides some leadership for the US Dollar, and moves away from Greenspan’s easy money air show.

Respect in any game is earned, not appointed. For now, team Bernanke/Paulson is running out of time on the clock and, for now, I am not ready to bet on their coming out of this looking like they won mine.

Best of luck out there today,
KM



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MGM: Q2 DOESN’T MATTER BUT EVERYTHING ELSE DOES

MGM MIRAGE will release EPS on Tuesday before the open. There is chatter that Q2 wasn’t “that bad” despite some horrible May Strip gaming revenues released by Nevada. Does that mean I want to rush out and buy the stock? Probably not. The major issues MGM faces are prospective from Q2, not least of which are related to CityCenter and liquidity issues, potentially as early as 2009. Let’s delve into the issues that actually do matter and will hopefully be addressed on the call.

  • 1. Room rates moving back to loss leader status – I’ve written extensively about rates regressing to the mean. LV casinos need occupancy to fill the big fixed cost structure known as the casino. Casinos drop rates faster than Seldon hit the deck against Tyson at the MGM Grand in 1996. Rate changes fall right to the bottom line. The first chart highlights ADR as a clear driver of EBITDA margin.

  • CityCenter financing – This is certainly not the environment to be raising billions of project financing for a consumer centric project. Currently, MGM is kicking in $100m a month to the project until financing can be arranged.

  • MGM MIRAGE liquidity – MGM management was smart and fortunate to sign such a flexible and low cost credit facility. The problem is that it matures in 2011. The bigger problem is that the company will exhaust its availability, sometime in 2010, unless they obtain additional financing. As the second chart shows, MGM’s liquidity position is tenuous as early as 2009 if they are forced to fund CityCenter throughout 2008.

  • Potential Condo cancellations – MGM has indicated that the $8.5bn CityCenter price tag is net of $2.7bn in residential sales. The company won’t come close to this number. The rate of current cancellations is meaningless. Buyers will wait until the last minute to cancel. It’s a simple decision: First, do I still have the financial position to afford this thing; Second, does the drop in value since I signed on exceed my deposit. The first is unknown but in many cases a no, the second is probably a yes.

  • The dollar – Where would MGM’s results be without the weak dollar attracting significant foreign visitation. The company recently indicated that the percent of visitors at the Bellagio is triple the normal percentage. If the Fed starts raising interest rates and the US consumer economy remains soft, look out.

  • 2009 Recovery – Why is management confident that there will be a recovery in 2009?

  • MGM’s senior management team could be the smartest in the business. They’ve got some big hurdles to overcome. Let’s hope they outline their plan to address these issues as early as the Q2 conference call next week.

MGM's margins benefitted immensely from higher ADRs
MGM's liquidity position assuming company funding of CityCenter throughout 2008

Chart of the Week: HBI Options Pain

HBI's management team is heavily compensated in options. When Rich Noll said 'I'm not happy with sales results, he wasn't kidding. How's this chart for a motivator?

LIZ: Still on my ‘Favorites’ list

With JNY’s stock popping today, the obvious question is what happens to LIZ when the company reports tomorrow. The market is already assuming some good news. As bad as the retail space is, the data I’m looking at suggests that the market won’t be disappointed.
  • 1) First off, as it relates to P&L/Balance Sheet triangulation, LIZ is starting off in a similar place as JNY (see chart below – and see JNY post for info on how to interpret the chart). I think inventories are in check – in part supported by the year/year change in average selling price heading higher. At the same time, LIZ cycles against massive margin headwinds, which should solidify LIZ in the ‘sweet spot’ of its margin/inventory cycle.
  • 2) Wholesale business is still extremely poor, but sales decline in the core Liz Claiborne brand have stabilized since the last conference call. See Exhibit 2.
  • 3) Check out my 5/13 post as to why I like this name over the next 1-2 years. It has arguably more fat than any other company in the space. With a new CEO who is bordering on not being ‘new’ anymore, he has to either a) show that his recent investments are working, b) cut costs if his bet was wrong, or c) lose his job. I think any of them is a positive stock event. The Board has changes incentives to facilitate 2009 as the break-out margin year – and I think this is attainable even with supply chain pressures.
  • Full disclosure is that my Partner Keith McCullough (he’s the expert on the stock – and me on the fundamentals) is not a fan of this name now from a quant standpoint. I’ll bow out of the debate as to whether it is going up or down by a couple bucks near-term, but the 1-2 year margin call is going to be tough to justify only a $13 stock if I am right.
I think that LIZ heads squarely into Quadrant 1 with 2Q results.
Liz Claiborne Department Store sales appear to have stopped eroding during the quarter (source: NPD).

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