The US equities indices finished mostly higher on Thursday and the Dow, S&P, NASDAQ and Russell all recorded their sixth straight day of gains.  But underneath the hood it was not so green.  Five of the nine sectors were actually down on and Healthcare looks to be breaking down.  Every day this week, Volume has accelerated day-over-day as the advance/decline line is breaking down.   


On the MACRO front, the earnings season is a tailwind so far, with much of the good news yesterday coming out of the early-cycle Industrial (XLI) names.  The big disappointment came from initial claims, which unexpectedly jumped 24,000 to 484,000, the highest level since late February (but the government gave us the Easter caveat).


Also on the MACRO front the Empire Manufacturing Index, improved to 31.9 in April from 22.9 in March and the Philadelphia Fed Index improved to a better-than-expected 20.2 in April from 18.9 in March.  While industrial production raised just 0.1% m/m in March vs. consensus expectations for a 0.7% gain. 


Internationally, sovereign concerns surrounding Greece remained above the fold and adverse liquidity developments out of China are working against the RECOVERY trade.


The Industrials (XLI) was the best performing sector on the back of the transportation names.  The sector benefited from a positive pre-announcement from UPS which traded up 5.3% yesterday.  The company pointed to a significant acceleration in its international package and supply chain businesses, along with improved operating margins across all three segments.  Consolidation speculation continued to provide some support with Continental and United in merger talks. 


The Technology (XLK) outperformed, with the SOX +0.3% - PC-leveraged names such as INTC +3% and AMD +2.7% were among the best performers.  GOOG reported after the close, missing some estimates.   


After a big up day on Wednesday, the Financials (XLF) was the worst performing sector yesterday.  The banking group declined with the BKX down nearly 1.0% on the day.  The regional names, which have come under some heightened scrutiny from a valuation perspective, were among the laggards in the group.


For the second day in a row the Energy (XLE) and Materials (XLB) just slightly underperformed the Market.


Crude is looking to have only one up day this week due to below expectation MACRO economic data.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (83.35) and Sell TRADE (87.61). 


The commodity complex was hurt by a stronger dollar yesterday.  The Dollar Index was up 0.36% yesterday.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (79.57) and sell TRADE (80.80).


Yesterday we bought the VXX and shorted the SPX.  The VIX rallied 1.9% yesterday; the Hedgeye Risk Management models have levels for the VIX at: buy TRADE (15.30) and sell TRADE (17.07).


In early trading, gold is trading higher as a hedge against inflation.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,123) and Sell TRADE (1,169).


Copper prices are trading lower as the Chinese continue to signal that their white-hot economy needs to cool down.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.48) and Sell TRADE (3.64).


In early trading, equity futures are trading slightly below fair value on disappointing reaction from Google's earnings.  This is also creating weakness in the Asian markets overnight, which has spilled into European trade. Today’s highlight will be March housing starts, earnings from BAC and GE, plus any further developments regarding Greece.  As we look at today’s set up the range for the S&P 500 is 19 points or 1.4% (1,195) downside and 0.2% (1,214) upside. 


On the MACRO calendar today:


  • March Housing Starts
  • Building Permits
  • April U. of Michigan Confidence


Howard Penney

Managing Director














Here is our Q1 2010 earnings preview and a "YouTube" from Q4.



MAR is scheduled to report its 1Q2010 results next Thursday and numbers should be good but that is probably expected. Our estimates for the quarter are in line with the Street and ahead of management guidance.  Everyone knows that RevPAR is tracking way ahead of expectations and the occupancy recovery has been exceptionally strong.  We think it will be interesting to see the flow through of better RevPAR to EBITDA on the owned side of the business, since occupancy does bring more cost with it.


For FY 2010 we’re at $974MM of adjusted EBITDA which is 3% ahead of the Street and just above the top end of guidance. 

While there are no bargains in lodging right now, we do like the MAR model and believe that it is less expensive than the real-estate leveraged companies.  Investors seem overleveraged to the earlier cycle hotel owners.  That relative trade may have already played itself out.  Buying MAR at 12x 2011 isn’t crazy in light of upcoming multiple year up cycle if you want to have exposure to the space.






  • “While relative, corporate demand is picking up, cancellations are running again at normal levels and our 2010 group bookings continue to build. In December, new group bookings for any time in the future were both higher than the prior year and ahead of our expectations. We saw meaningful improvement in occupancy in December and January, businesses getting back to work. Adding it all together, we believe U.S. RevPAR growth should turn positive sometime in the second half of 2010. Outside the U.S., RevPAR will likely turn positive faster and yield a higher RevPAR in 2010 than in 2009.”
  • “Of course, pricing will recover slowly.”
  • “For the domestic Marriott Hotels and Resorts brand, group room nights on the books for 2010 are down 2% adjusted for last year’s cancellations and attrition and room rates for that business are down 3% year-over-year. Outside North America, group room nights on the books are also down 2% but room rates are down a bit more. Still, with pent up demand and easy comparables, we expect our in the year for the year group business to improve from these levels.”
  • “Our special corporate rate negotiations are nearly complete and special corporate rates for 2010 are running down modestly from 2009 levels.”
  • “For the Marriott brand … by the fourth quarter, occupancy was roughly flat and by period 13, occupancy increased roughly 1 to 2 percentage points.”  
  • “For most of 2009, we saw weak corporate room demand, but that is changing. Comparable room nights for corporate rated business in the Marriott brand declined 13% in the full year 2009, were flat in the fourth quarter, but rose 10% in period 13. On the other hand… room rates remain weak. For the Marriott brand, room rates at domestic company operated comparable hotels declined 12% in 2009, 11% in the fourth quarter, and declined 8% in period 13”
  • “In the fourth quarter, international occupancies increased slightly and in December occupancies increased 4 percentage points year-over-year. Demand in Europe and the UK strengthened with the improving transient and group demand. In the first quarter, we expect London and Paris occupancies to increase at double-digit rates. In Asia, occupancy rates rose over four percentage points in the fourth quarter, dramatically exceeding our expectation. Occupancy in our hotels in China increased over five percentage points in the fourth quarter, with better than expected domestic corporate demand.”
  • “Costs are likely to rise in 2010 and margins will be under more pressure from room rate  weakness, but we continue to work to identify more efficient ways of doing business.”
  • “Property level cost cutting is largely behind us, so incrementally weaker RevPAR will be more difficult to mitigate”
  • “We do try and hedge our currencies, particularly in the liquid currencies like the euro and the pound, I think we’re probably 60 to 70% hedged for 2010.”
  • “I think on balance we would expect incentive fees full year when 2010 closes out to be very modestly lower than those of 2009 as all those factors sort of go through.”
  • “View that ballpark we ought to be opening the same number of rooms in the next few years in each year, but obviously we’ll have to see how the economy develops and a little bit on how the financing market develops to know that for sure.”
  • “I think the comparisons that make it hard to extrapolate too much from what we’re seeing now is what we talked about before, which is the incredible pessimism that we were dealing with in the marketplace a year ago and as a consequence I think we are seeing a significant increase in volumes. So whether it’s our data from December and January, whether it’s the Smith Travel data that you look at, you see occupancy growth in virtually every segment….And I think as a consequence they’ve [luxury hotels] got a good number of months ahead of them where they’re going to post occupancy growth.”
  • “I think on margins and on owner returns, you’re going to see this year continued albeit modest hourly wage growth. I think we’ll see a continued growth in healthcare costs, management wages because they were really devastated in 2009, are likely to be up in 2010. There will be less benefit from a reduction in the number of managers because we’ve cut that already very deeply. And there will need to be and the management team deserves to be compensated with some bonus potential that really has not flowed through to them in 2008 or 2009. All of those are going to put some pressure on margins, and as a consequence in an environment in which particularly occupancy is moving first and rate is starting the year continuing to be down, we’ll see continued  pressure on house profit margins and owner returns.”
  • “The likelihood that timeshare even in a strong consumer environment and decent recovery there would ever get back to the same percentage contribution to company, I think is very, very slight. And it will end up being a smaller part of our business than it was at the peak”



  • “In 2010, we expect new timeshare inventory spending to be both lower than 2009 spending and over 100 million lower than our expected cost of goods sold… With lower investment spending in 2010, we expect 2010 timeshare net cash flow should increase to about 175 million to $200 million.”
  • “For those of you with different RevPAR outlooks, we believe that one point of worldwide systemwide RevPAR is worth about $10 million to $15 million in total fee revenue and about 3 to $4 million of profits on the owned leased, corporate housing and other line.”
  • [Timeshare] “We’re working under the assumption that contract sales in 2010 will be just slightly better than the 2009 level. All in all, in 2010 we believe our timeshare business could generate 170 to $180 million on the timeshare sales and services net line and 145 to 155 million in segment earnings.”
  • “We anticipate that Marriott’s adjusted general administrative and other expenses will increase 2 to 4% to 635 to 645 million in 2010 as we resume investing in our business and our people for the future. We expect wages will rise modestly in the second half and management bonuses will be reinstated in 2010. While changes in our deferred compensation program will reduce deferred comp expense on the G&A line by about $15 million in 2010, we’ve cautiously assumed roughly $15 million of additional performance related charges for a few hotels in that year as well.”


We have been short YUM, which has been the wrong call, particularly into first quarter numbers, which came in better than both sales and earnings expectations.  That being said, I continue to have my concerns, largely related to what I recognize

as overly aggressive unit growth in China and profitability issues in the U.S. 




The most surprising upside came in China with same-store sales up 4% in the quarter, accelerating 400 bps sequentially from the fourth quarter on a 2-year average basis.  Management commented that it benefited from a very strong Chinese New Year during the first quarter on top of trends that point to an improving consumer; though it would not yet call it a recovery.  The company guided to a similar magnitude of same-store sales growth in 2Q10 as reported in 1Q10.  Relative to YUM’s full year +2% same-store sales outlook issued in December, this implied +3% to +4% 2Q guidance points to upside in the full-year numbers as the company’s same-store sales comparisons get easier for the remainder of the year (management did not revise its full-year guidance).  


This 2Q guidance, though it may be conservative, also implies a sequential slowdown in 2-year average trends as YUM is lapping its easiest comparison from 2009.  A +4% number in 2Q10 would represent a 300 bp sequential deceleration from the first quarter on a 2-year average basis.  Maybe management is concerned that the strong holiday drove a lot of the momentum during the first quarter, which is obviously not sustainable for the remainder of the year, in addition to its concern that the consumer has not yet fully recovered.


Despite the strong first quarter performance, the +14% new unit growth, combined with 4% same-store sales growth, should add up to approximately 18% system sales growth.  YUM China reported 15% system sales growth which highlights a decline in new unit AUVs.  In response to a question during the earnings call, management stated that there is a $300K gap between new unit AUVs and the rest of the system, which it attributes to the fact that the company is opening in smaller cities which generate lower sales but also require a lower cost structure.  This will be an important trend, although not new, to monitor because lower new unit AUVs is typically a sign of growing too fast and cannibalized sales.





U.S. same-store sales of -1% showed marked improvement from the -8% in the fourth quarter.  Pizza Hut led the charge with same-store sales up 5%. Management attributed the strong sequential recovery at Pizza Hut to its “$10 Any Way You Want It” pizza promotion.  This promotion hurt average check, which was down 10%, but more than offset it with increased transaction growth, according to management. 


Although we knew trends had improved at Pizza Hut, as reported earlier by NPD, the 750 bp sequential improvement in the 2-year average trend was impressive.  Despite this better top-line performance and $5 million in commodity deflation, operating profit declined 9% in the quarter.  Although same-store sales comparisons get easier in the back half of the year after lapping the Kentucky Grilled Chicken launch from 2Q09, the commodity benefit is expected to go away and turn inflationary as we trend through the year as management is expecting costs to be relatively flat for the full year.  In addition, the operating profit growth compares get more difficult for the next two quarters as the company benefited last year from implementing a $65 million reduction in its U.S. G&A cost structure.


It is also concerning that more consumers at Taco Bell, YUM’s most profitable U.S. concept, are buying from the “Why Pay More” menu.  This, combined with the need for promotions at Pizza Hut that drive average check lower by 10%, will put increased pressure on U.S. profitability.  Despite easier same-store sales comparisons in 2H10, I do not find much comfort in management’s comment that it is comfortable with its full-year 5% U.S. operating profit growth outlook as the company consistently misses its U.S. operating profit targets.  To recall, YUM’s initial 2009 U.S. operating profit target was 15% and it came in at +1%.


All in, the first quarter was a strong start to the year for YUM.  To that end, I think it will be difficult for the company to maintain this momentum for the following reasons:

  • China’s margin performance of 1Q won’t continue - Expect moderate year-over-year improvement over China’s 21% margins in Mainland China last year
    • Commodity inflation is expected in the back half of the year (reported commodity deflation of $15 million in 1Q10)
    • YUM is facing increased wage inflation in 2H10 after facing lower than usual wage growth rates in 1Q10
  • YUM is facing its most difficult U.S. SSS comparison in 2Q10 as it laps the Kentucky Grilled Chicken launch, which drove KFC comps positive for one quarter
  • U.S. operating profit growth comparisons get more difficult for the next 2 quarters and commodity deflation with likely turn inflationary
  • After tax results will be challenged in the second quarter as the company laps the favorable 16.4% effective tax rate from 2Q09




On the way to achieving 9th straight year of double-digit EPS growth

  • Worldwide 1Q operating profit grew 17%, EPS grew
  • China division’s profit grew 37%
    • SSS growth and unit growth
  • U.S. sales improved also, particularly PH
    • U.S. profits down 9%, SSS declined 1%
  • YRI system sales increased 1% and profits increased 2% prior to FX
    • Driven by new unit development

Overall, pleased with the start to 2010.




Continue to build leading brands

  • SSS grew by 4%
  • Units grew by 14%
  • Rest margins at 27%
  • Profit growth of 37%
  • Lapping 30% profit growth in 1Q09


New Unit development is the major driver of growth

  • 96 units opened in 1Q
  • Surpassed 3,500 units
    • Leading position in China


  • 1.4m dollars AUV per year
  • Delivery is now available in over 110 cities
  • Developing sales layer now over 3% of sales
  • Breakfast represents 7% of transactions and continues to grow
    • Nearly 3,000 KFC units in over 650 Chinese cities


Pizza Hut

  • Leading western casual dining concept in China
  • Double-digit SSS growth
  • Menu appeals to Chinese consumers
    • Updating 25% of menu every six months
    • PH has 467 units in 122 Chinese cities

Other minor brands also gaining traction




Strategy is to aggressively expand

  • New unit development is a key driver
    • 109 openings in more than 40 countries during 1Q
  • Network of 1,000 franchisees
  • Goal of 900 for year
  • SSS declined 1%
  • 2% op profit growth excl FX



  • Expanding value menu to more markets using proven strategies
  • Incremental sales layers
    • KFC breakfast – KFC AM continues to grow


Pizza Hut

  • Everyday affordable prices
  • Weaker transaction trends due to check but menu is being changed


France, India and Russia delivered 14% system sales growth prior to FX in 1Q10

  • KFC expanding aggressively in these markets
  • Provincial cities
  • In Russia, 150 KFC units in 22 cities
  • In India there are 74 KFCs in 14 cities and 159 Pizza Huts in 33 cities
    • KFC is leveraging television advertising to build brand awareness


Two new Taco Bells opening in London





Strategy is to improve brand and returns

  • Pleased with improvement from 4Q09


Pizza Hut

  • Promotion has helped bring people back
  • Check was too high
  • Going from Pizza to Pizza, Pasta, and Wings
  • Turned corner on sales trends


Taco Bell

  • Disappointed with -2% decline in SSS as people increasingly traded down
  • Pipeline of products is strong for the rest of the year


KFC’s performance improved sequentially

  • Balanced options – fried and grilled chicken
  • Portable options – double down
  • Improved operations
  • Performance has improved from 4Q and company expects this to continue


Took a non-cash charge that basically reflects the beginning of refranchising KFC to 5% company ownership.  That is also our goal for Pizza Hut, where we’ve already begun the journey and are well on our way.



Chief Financial Officer


1Q results

  • Strong Chinese holiday
  • SSS of 4%, system sales growth of 15%
  • Consumer confidence in China has improved yoy the past three months
  • Benefitted significantly from chicken cost inflation vs prior year and lower-than-usual wage inflation


  • Sales results weak in developed markets like Japan and Canada
    • Dampened overall results for YRI’s quarter
  • Only 2% profit growth prior FX
    • Post FX growth was 13%


United States

  • Unemployment and discounting environment is difficult
  • Taco Bell experienced higher Why Pay More mix and had lower drink incidence
  • Reduced G&A by 6m dollars


Outlook for 2010

  • Expect moderate SSS growth in China in the second quarter
  • For the U.S. expected that positive sales growth will come in 2H10
    • Comps easier in 2H
  • China’s margin performance of 1Q won’t continue
    • Commodity inflation in back half and a bigger impact from wage inflation
  • Expect moderate year-over-year improvement over China’s 21% margins in Mainland China last year
  • After tax results will be challenged in the second quarter as a favorable 16.4% effective tax rate before special items is rolled over
  • Confident that 10% EPS objective will be met


Strategy for emerging markets

  • Significant growth opportunity


Emerging markets – China, Indonesia, Malaysia, India, Brazil… collectively there markets are growing at a fast rate.  Long runway for restaurant growth in those countries.  Further, in top ten emerging markets, YUM has 1.5 units per 1m people.

  • 10,000 units in emerging markets.  55% of YRI + China units.  Larger than peers in these markets and growing fastest. 
  • 2x MCD’s emerging markets presence.  Most of YUM’s competitors aren’t even opening in emerging markets. 


In upcoming calls and investor meetings, YUM will provide more color on these emerging market strategies.








Pizza Hut value…what is the impact on mix from the $10 promotion. How are you thinking about sustaining value there going forward?



Posted strong sales in 1Q of 5%.  Addressed the biggest problem, which was value.  Comparable margins have held steady.  Flow through has offset the drop in price.  Brand is improving as a result of the initiative.  Working hard with franchisees on sustaining compelling value. 


Check was down about 10% but transactions increased at a much faster rate.




How are you responding to the consumer’s reaction to shrimp taco?



People like it. We have some product supply issues because the shrimp tacos flew off the shelves. Made a lot of sense to have it during lent.




Detail on consumer environment in China…your results were strong, what is giving you pause in calling for the recovery in the Chinese consumer?



Consumer confidence has gone up the last three months but still below where it was a year, year-and-a-half ago….(but they are up year-over-year?).  Other metrics are positive.  We are focusing more development on the stronger regions (coastal regions are not recovering as fast).




Seen anything from 1Q to suggest that low-to-mid single digit comp is unsustainable for the rest of year?



No significant change from 1Q levels as yet.




The profit for 1Q was down domestically, food costs aren’t going to help going forward, how do you feel about the U.S. business, profit-wise for the year?



Overlaps get easier in the second half of the year. Not assuming a great economic recovery for domestic business to get better.  Things are better than they were in 3Q, 4Q last year.  On the commodity side, there was some deflation in 1Q. Current guess is that it will be flat for the full year. Value, product, and managing costs are the three key focuses at our domestic brands. 


Still comfortable with 5% growth in U.S. outlook




Pizza category in the U.S., who are you taking share from? Is it sustainable?



More competitive on the pricing front. Usually when YUM grows like it is right now, it comes from overall category and the “mom and pops”.




You have been running without menu pricing in China for at least six months, what’s the new opportunity in coming quarters, especially if there is inflation in 2H10?



Labor and costs were unusually low but we’re studying what we want to do now for the back half in terms of costs. 




Update on KFC U.S. business. Last quarter some of the franchisees were behind in royalty payments – has there been improvement there? 



Bad debt did a little better in 1Q. Hopefully we get in to a better seasonal time now.


Regarding refranchising, we’re on a three year refranchising program that really started in ’08.  In the first two years of that,

Long John Silver was fully refranchised.


KFC continues to be the biggest challenge in the US. Likely will be negative in 2Q as grilled chicken is lapped.


More innovation around “balanced” and “high-end” opportunities.




YRI, why have sales remained soft in key markets like Australia and the U.K.?



Australia has had a strong run of consistency. Pipeline and innovation has fallen behind.  Expect that business to perform better. The brand is strong there.  In the U.K., pleased with the progress of KFC which had a great year in 2009.  Pizza Hut is big challenge there, not affordable.  In the early days of making a substantial change there. 




What kind of comp do you need to offset coming increases in fixed costs?



In 2H09 the government didn’t take up minimum wages. In 1H10 Yum is benefitting from that. In 2H the company will be impacted by that.  For the full year there will be a moderate increase.  A modest comp is required to offset that. 

Normally wages in China are in the 8% to 10% level.  Rates were lower than that in the first half of the year but will be higher for the balance.  Should average 10% for the full year. 




All of the publicly traded pizza players saw big improvement in comps. Is there any other place you can get market growth from? One of your competitors said that market has been declining but it now ticking up?



There’s nothing like the power of having the leading brand.  When you’re value competitive, your odds are better.  We’re trying to have a two-fold strategy. One is to compete better in the pizza market value-wise.  The other is to leverage variety – pasta and wings being added into the equation and marketing them primarily during the week. 




China, new unit volumes.  Are we still looking at 200k difference in new unit volumes? What is the ramp for new units?



AUVs are 1.4m and new units come in at 1 or 1.1m.  That trend has been intact for a while.  As you get to the smaller cities, margins are similar despite lower sales because cost structures are lower there. 




U.S. Taco Bell business.  Can you talk about the -2% comp and the lower level of drink incidence? 



Lower average guest check. Less drinks and combo meals.  Most media spend was on the value side.  The “why pay more” usage was a higher portion of mix.  More and more people are at the low end.  We did have positive transactions and we can build off that strength. 


Biggest challenge is to get SSS going. Easier to build off positive transactions.  Also extremely enthusiastic about results from longer term initiatives. Optimistic about the future of the brand and TB can get modest SSS growth for the balance of the year.  Sales layers being added will help TB become a net new unit developer. 




SBUX, MCD, DPZ results seem much better internationally.  If there’s anything that’s going to change from a management perspective, remodels…can you give color on that? Can you also comment on company store margins in the YRI division?



No question that YRI has problems that need to be addressed.  Focused on value.  Looking at value menus that have been successful in South Africa and expanding into U.K.


Rolling out incremental sales layers.  Frozen beverages….


Hoping for a better second half in 2010.




Any benefit from New Year being in February as opposed to January?



No dramatic shift between Jan and Feb.  Was check flat and transaction up 4?




Internet coupon deal that went awry in China?



Couponing error caused some concern among customers, short term issue.




Cost for YUM in terms of healthcare? Any push back in refranchising?



Small impact this year but the major impact of the legislation will be in 2014. We’re going to 5% ownership of KFC and PH. Lots of legislative details to be ironed out. Will cost $15k per store starting in 2014.  Plenty of time to deal with the issue.




With comps up 4% in the first quarter that was versus a +2%.  In 2Q last year it was down…can you drill down deeper and tell us why the trends won’t accelerate. Anything in 1Q that isn’t flowing through? 



Looking at it in terms of 3, 2, or 1 years is not the point.  We expect moderate growth from 2Q last year.




Corporate expenses were down this quarter…is this $30m per quarter run rate to be expected going forward or was it unusual?



U.S. saw a reduction in G&A.  Goal is to offset refranchising costs with G&A savings. 




Is the $10 price point important to keep for PH? Even with a change in toppings…or is the variability of getting whatever you want more important?  Separate occasions for pasta and chicken or bundling?



Relative value is the real key here. More into separate occasions than bundling. 


YUM - ENTER THE DRAGON? - mainland china









Howard Penney

Managing Director


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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 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



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.


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.





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


  • 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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