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CITYCENTER OF DISASTER

For a variety of reasons, the numbers for CityCenter’s first full quarter of operations were ugly.

 

 

After $9BN (or $8.6BN to be exact – since the Harmon tower was left incomplete), MGM’s Mona Lisa produced an EBITDA loss of $28MM in its first quarter of operations.  We get to adjusted EBITDA by starting with an operating loss of $255MM less $171MMof impairments plus $24MM of forfeiture deposits on condos less $7MM of pre-opening expenses.  Yes this is worse than almost anyone’s guess.   Here are some general thoughts as to why:

  • Expenses are too high – A lot of expenses need to be carried when there are a lot of unsold condos.
  • Revenues are too low – It’s difficult to leverage such a huge development with 63% occupancy.  As management stated recently, Aria opened with almost no convention business on the books... so midweek occupancy and play levels are miserable.
  • Funneling of high end players to wholly owned properties – We have no direct knowledge of this but I think MGM would rather have 100% of some Chinese tycoon’s $100k bets than 50% but that’s just a guess.  The database is all MGM and the wholly owned higher end properties did perform better than we expected (Bellagio in particular).

 

ARIA

Aria suffered an EBITDA loss of $12MM.  Disappointing but not a shock since Strip hotels are not built to be profitable at sub 80% occupancy and ADR’s this low.

  • Slot win of $28MM (we heard from a few sources that the first few months were running at $9MM/ month).  I guess Server Based gaming isn’t producing great results just yet… but there are still 7 quarters left for the trial to produce ROI results
  • Table win of roughly $45MM or $3,700 per table… not too bad.  However, we heard that the property played lucky in Jan & Feb but that volumes dropped off in March (Jim blamed it on hold).  Q1 is also a pretty big Baccarat quarter.
  • Room revenue of $44MM
  • Total revenues of $146MM, implying operating costs of $158MM. 
    • This compares to around $415MM of annual operating expenses at Venetian LV or $841MM annual of operating expenses at Venetian & Palazzo in 2009
    • $985MM annual total operating expenses at Wynn/Encore Las Vegas
    • $790MM of total operating expenses at Bellagio in 2009
    • We estimate that Aria will produce EBITDA of only $55MM in 2010 ramping to by $218MM in 2012

 

CITYCENTER

So if you back out the $12MM of EBITDA losses at Aria, that implies the rest of City Center lost $16MM of EBITDA – that is, Vdara, Crystals, Mandarin, and the cost of carrying those wonderful unsold condos.   We assume that Vdara, Crystals, and Mandarin positively contributed to EBITDA although at a very low margin since all of these assets are operating below optimal capacity.  We estimate the $16MM EBITDA loss is really coming from the carry cost of the unsold/unclosed condos, since MGM is still on the hook for maintenance, real estate taxes, and some fixed operating expenses for these condos.  Only after these close and maintenance fees start trickling in from the owners does MGM get some income to offset these fixed costs.  If MGM closes on all the condos these costs will eventually go away.  For now, we’re projecting CC will produce $19MM of EBITDA, ramping to $290MM in 2012.

 

Not much more to say.  CityCenter ain’t getting it done.  It was built for a different era and it’s unclear whether we’ll see those good times anytime soon.


MGM CONVERT CALL: "NOTES"

Surprise, surprise, MGM is bullish!  Kudos to MGM though for the timing of the convertible.  We thought it was a good idea at $12 so they are smarter than us.

 

 

MGM is starting their roadshow today for a private offering of $750MM convertible senior notes due 2015, proceeds of which will go to repay part of the outstanding debt drawn on MGM's revolver.  MGM will also enter into capped call transactions to reduce the potential dilution of the notes, when and if MGM's stock reaches levels that exceed the convert strike. Below are our notes from the call.

 

 

CALL NOTES

 

Security Detail

  • Coupon is 4.5%, (4.25%-4.75%)
  • 15% over-allotment option for 13 days
  • 2015 maturity
  • Non-callable for life
  • 100% of par put feature upon "Fundamental Change"
  • Call caps will raise premium up to 50%
  • 60 day lock up for the company and Tracinda
  • Book-runners: BoFA/ML, Barclays, JPM, DB
  • Books close at 2:30pm today and notes close & fund week of April 19th

General Company Commentary

  • Las Vegas market has stabilized
  • MGM's capital needs are minimal over the next few years - will spend less than $200MM/ year in maintenance over the next few years
  • Believes that CityCenter will be the significant driver of visitation to Las Vegas 
  • Non convention visitation to Las Vegas is up 4% (yeah but these people spend very little money)
  • Believe that the convention business in town is starting to improve and saw early signs of that this quarter
  • Apparently South West is looking to add capacity to Las Vegas in the spring
  • Domestic and play has been weak and will likely remain weak over the near term, but International is very strong
  • MGM market share, even excluding Aria, has increased in Las Vegas
  • Convention business for MGM will be up y-o-y starting 2Q2010, and convention rooms on the books for 2011 are up 20% from where they were a year ago for 1 year forward... so this favorable mix shift will help them increase realized ADR
    • Booked 508k convention room nights in 4Q09
  • Claims that MGM is starting to be able to raise rates more than they have to lower them...
    • Ok what does that even mean? Just say hey - ADR is up y-o-y in April
  • Believes that RevPAR will be up year over year in 2H2010
  • Launching a new players club in 2H2010 (launched in June)
    • database has 60MM people, of which 29MM are current Players Club customers
    • New Players Club will be more transparent with a new look, tiered cards and revealed comps
  • Operating leverage:
    • 1% change in occupancy = $36MM of EBITDA
    • $5 ADR = $54MM of EBITDA
    • $5 RevPAR = $38MM of EBITDA
  • I love how Jim describes CityCenter - "very beautiful and people love it"... well unfortunately it makes no money
  • Aria is already reaching 70% occupancy; thinks it will get to 80% by YE.  Aria had good international gaming numbers and good domestic numbers around events - otherwise it's been slow
  • Just starting closing on the condos.  Started Mandarin in the beginning of the Q, Vdara at the quarter end, and Veer will start closings in 2Q2010
  • Crystals made money in the 1Q for CC
  • This offering is another step in MGM's efforts to deleverage its balance sheet. MGM Macau's IPO in the 3Q2010 will help them in this goal, as will the sale of their 50% interest in Borgata
  • Their $380MM tax refund didn't hurt either....(in their deleveraging effort)
  • Held a little lower than last year - but still in the normal range
  • Expects that CityCenter and Aria will be the most profitable properties on the strip

Q&A

  • March revenues in Vegas?
    • Volumes were good but hold was weak
  • "Having good gaming activity in Vegas in April"
  • MGM RC covenants use CC EBITDA not just EBIT to arrive at leverage calculation
  • CityCenter - no covenants there for first 18 months anyway. There are leverage covenants kicking in 3Q2011
  • Cash infusion to CityCenter from the parent later this year?
    • Depends on business activity
  • Want to get under 5x leverage over the next 5 years
  • Will use proceeds from offerings to reduce the RC outstandings
  • Players Club:  5MM have visited over the last year and visited on average 2 properties per visit (out of the 29MM in their database)
    • 40% of MGM's total slot revenues comes from their 2 MS properties and Detroit. However, they capture very little of those customers' play when they come to Las Vegas.  So they need to be smarter on their cross marketing efforts.
    • They don't currently have a tiered card... want to be more like HET - which is the gold standard of cross marketing
  • Cash balance at CityCenter & cage cash at quarter end?
    • Will not disclose
  • Baccarat volume was up 20% y-o-y, excluding Aria
  • Borgata was included in the other unconsolidated line this quarter, but going forward it won't show up on the income statement until they get a distribution from the trust upon the asset's sale.

FL: Immediate-Term Overbought

Foot Locker has been one of our favorites all year, and we think that throughout 2010 the fundamentals will support the stock heading meaningfully higher. Please check out any of our prior posts or our FL Black Book for more details there. 

 

But stocks don't trade in a vacuum. 

 

Per Keith's risk management models, FL is finally immediate term overbought here, with TRADE line support = $15.36 (about 4% lower). For those who have been watching this name go up from the sidelines, a pullback here might be your second chance.


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Sorting Through Easter Noise – Easing Compares Arrive

R3: REQUIRED RETAIL READING

April 15, 2010

 

 

TODAY’S CALL OUT

 

With the Easter holiday falling a week earlier this year, it’s easy to be jolted by the considerable sequential deceleration in footwear trends reflected in this week’s data. While optically striking, it’s important to keep a few things in perspective as one week never a trend makes.

 

For starters, when looking at March-to-date trends in an effort to negate the calendar shift, industry sales are up 7%.  Importantly, this is consistent with the rate of growth we’ve seen since early February.  Additionally, it’s important to be mindful that beginning this week, the ‘tough compare’ argument becomes less credible-as footwear embarks on a 5-month stretch of easing compares.  In the near-term the most difficult compares and the calendar noise are now behind us, which gives us continued confidence that strength will persist across the athletic footwear space.  Oh, and don’t forget Nike’s big product push is still on the horizon.

 

Sorting Through Easter Noise – Easing Compares Arrive - Footwear Apparel 1 Year

 

Sorting Through Easter Noise – Easing Compares Arrive - Easter Table

 

 

LEVINE’S LOW DOWN 

 

- In an effort to keep Ralph Lauren’s new flagship store in Paris true to its American roots, the in-store restaurant has been crafted with guidance from New York restaurant icon Danny Meyer. The menu is entirely American, cooked by French chefs, trained by American chefs. The goal was to offer a truly authentic American menu and one with little French influence. The menu includes burgers, fried chicken, and beef flown in from Ralph Lauren’s Colorado cattle ranch.

 

- Genesco noted that its top priority for use of cash is to make an acquisition, grow a new concept, or to make a niche-acquisition. However, if opportunities in those areas do not present themselves, the company would then look to share buyback as a means to enhance shareholder value.

 

- Consistent with its track record for beating expectations, PVH confirmed that business trends remain robust and there’s a high likelihood of exceeding full-year guidance at a conference earlier today. Assuming a margin of conservatism with Tommy related synergies, additional upside is likely to come from better than expected growth in southern European markets. Despite being highlighted by other retailers as a challenging market, Italy is a pocket of strength for not only PVH, but WRC as well.

 

- In a prime example of chasing the trend, management of GCO mentioned that while their merchants don’t sense toning is going to become a fashion item for teenagers (their primary demographic), the category has become such a compelling trend that they are currently testing it. Sounds like the makings of a new Rock ’n Roll line.

 

 

HEDGEYE CALENDAR

 

Sorting Through Easter Noise – Easing Compares Arrive - Calendar

 

 

MORNING NEWS 

 

Long Beach Container Traffic Slows in March - March container traffic growth slowed to 13% growth from 30% in February.  The monthly container cargo count at the Port of Long Beach increased 13% in March to 422,774 twenty-foot equivalent container units compared to the same period last year. It is the fourth consecutive month of volume increases at the Port in the year-to-year comparisons. A total of 206,652 TEUs were imported through the Port last month, a 10.8% increase over March of last year. Empty containers, mostly bound overseas for refilling, was up 22.3% to 85,627 TEUs. <polb.com/economics/stats/tonnage>

 

Sorting Through Easter Noise – Easing Compares Arrive - Long Beach Container Traffic 

 

CPI Growth Slows for Apparel - Retail apparel prices declined a seasonally adjusted 0.4% in March compared with February, and dropped 0.4% from a year earlier, the Labor Department said Wednesday in its Consumer Price Index. CPI growth has been sequentially slowing since December 2009.  Men's CPI growth has been declining at a faster rate, ending March down 3.9% while women's CPI growth is slowing but holding positive at 0.6%. <wwd.com/business-news>

 

Sorting Through Easter Noise – Easing Compares Arrive - CPI History Chart

 

LTD Expanding Globally - The company on Wednesday said it is creating Limited Brands Canada, a Montreal-based company that will support all Limited Brands retail stores and strategic expansion in Canada, including La Senza, Bath & Body Works, Victoria’s Secret Pink and Victoria’s Secret, which is launching in Canada later this year. LTD will consolidate the creative and merchant leadership of its international businesses at its corporate headquarters in Columbus, Ohio. Also on Wednesday, Limited Brands unveiled a franchise partnership with M.H. Alshaya, Co. to operate stores in the Middle East. Plans are to launch BBW stores later this year in the region. <wwd.com/business-news>

 

Quiksilver Sells Swim Brands - Quiksilver Inc. agreed to sell its Raisins portfolio of swim brands to AOM Holdings, LLC. The brands, which Quiksilver has operated since 1994, include Raisins, Raisins Girls, Leilani, Island Soul an Island Escape. <sportsonesource.com>

 

ANF Pays CEO to Not Use Corporate Jet - Abercrombie & Fitch is paying its chief executive $4m (£2.5m) to compensate him for curbing his use of the company’s corporate jet. <drapersonline.com>

 

Peru Foresees a 16% Increase in Textile Exports - Peru's textile exports are expected to grow by 15% to 16% for this year, beating the industry's estimates of 10%.

Drawback rates might be reduced from 8% to 6.5% from the month of June, in case of an effective recovery of general exports. <fashionnetasia.com>

 

Target is Busy Launching Collections - The ink is barely dry on the signage for Zac Posen for Target’s Go International collection, and the retailer is unveiling the next limited edition designer for its Go franchise. Gaby Basora will launch a collection at most Target stores and target.com on Sept. 10 featuring the Tucker brand known for its exclusive offbeat and charming prints. Target is partnering with fine jewelry designer Temple St. Clair Carr to launch a limited edition jewelry collection. <wwd.com/retail-news>

 

Brooks Sports Partners with Docs for Running R&D - Brooks Sports, Inc. announced partnerships with Prof. Dr. Gert-Peter Bruggemann and Prof. Dr. Joseph Hamill, two of the world's leading running biomechanics researchers. Both Hamill and Bruggemann will join forces with Brooks' award-winning footwear team to conduct large retrospective and prospective studies, each intended to garner information that will influence footwear design.  <sportsonesource.com>

 

ColdwaterCreek.com Leads Large Retailers in High Broadband Availability - ColdwaterCreek.com ranked first in high broadband availability tests among large retailers for March, says Gomez. Last month online shoppers could access the apparel and accessories retailer’s site 94.37% of the time. <internetretailer.com>

 

MW's K&G Fashion Superstore Steps It Up - Mary Beth Blake, president of the off-price K&G Fashion Superstore, has revamped the merchandise mix, increased the percentage of women’s wear, launched a designer showcase, upgraded the presentation and adjacencies in the stores, and launched a new image-centered advertising campaign. <wwd.com/retail-news>

 

Sorting Through Easter Noise – Easing Compares Arrive - K G image

 


CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC

The data is getting worse, but the jury is still out until we get past the Easter anomaly. After getting positive datapoints out of both JPM's March subprime unsecured print yesterday and this morning's COF March data (and DFS for that matter), the jobless claims data this morning laid an egg (for the second week in a row). Claims climbed 24k this week, and are now up 42k in two weeks - now 484k. There was no revision to last week's number. The 4-week rolling average rose 7,500 to 457,750.  Consensus had expected just 430k initial claims.  The chart below shows the rolling average trend line. 

 

CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC - claims 4wk

 

The last two weeks of data have been pushing claims farther outside our 3 sigma channel. To be fair, the Labor Department said that there were significant one-time items and Easter-related distortion affecting this week's number to the upside, but that's also the reason they gave last week, which is why the consensus for this week's number was off by a mile. We've said for the last month that we expect claims to improve, and so far we've been dead wrong. We'll reserve more final judgment until we see whether the Labor Department's explanations are valid (i.e. the next two weeks). Census hiring should continue to heat up this month and next. The following chart shows the raw claims data.

 

CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC - claims raw

 

As a reminder, the following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this spring. 

 

CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur


CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC

The data is getting worse, but the jury is still out until we get past the Easter anomaly. After getting positive datapoints out of both JPM's March subprime unsecured print yesterday and this morning's COF March data (and DFS for that matter), the jobless claims data this morning laid an egg (for the second week in a row). Claims climbed 24k this week, and are now up 42k in two weeks - now 484k. There was no revision to last week's number. The 4-week rolling average rose 7,500 to 457,750.  Consensus had expected just 430k initial claims.  The chart below shows the rolling average trend line. 

 

CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC - claims 4wk

 

The last two weeks of data have been pushing claims farther outside our 3 sigma channel. To be fair, the Labor Department said that there were significant one-time items and Easter-related distortion affecting this week's number to the upside, but that's also the reason they gave last week, which is why the consensus for this week's number was off by a mile. We've said for the last month that we expect claims to improve, and so far we've been dead wrong. We'll reserve more final judgment until we see whether the Labor Department's explanations are valid (i.e. the next two weeks). Census hiring should continue to heat up this month and next. The following chart shows the raw claims data.

 

CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC - claims raw

 

As a reminder, the following chart shows census hiring from the 2000 and 1990 census by month, which should be a reasonable proxy for hiring this spring. 

 

CLAIMS WORSEN TWO WEEKS IN A ROW - JURY STILL OUT AS LABOR DEPT SAYS DON'T PANIC - census chart

 

Joshua Steiner, CFA

 

Allison Kaptur

 


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