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Probably a better quarter than the competition but the real story is beyond FQ3.


We expect WMS to print an in-line quarter after the close on April 26th.  Given that the stock has run over 20% since we wrote “WMS: NOW OR LATER?” on 3/10/2010, we’re not as confident that in-line will be good enough.  While we doubt that anyone expects a beat, we do think that the consensus is WMS makes the quarter.  The challenged replacement cycle and weak state revenues limit the opportunity for quality upside to earnings.


However, WMS is not a FQ3 story.  WMS should be able to beat consensus estimates by a few cents next quarter and we believe that there is upside to FY2011 consensus numbers.  We refer people to our WMS Black Book which we released two weeks ago for the long-term analysis.


Below is some detail behind our estimates for F3Q2010:

  • Product sales of $123.7MM at a 53% gross margin
    • 4.2k NA unit sales and 2.7k international units sales
      • WMS should ship more replacement shipments to NA this quarter than last, since March is a seasonally better quarter for replacements
      • We also believe that international units will be up YoY given WMS’s recent entry into Australia and Mexico
    • ASP of $15.5k
      • Originally, WMS thought that they would be shipping more legacy Bluebird cabinets to Mexico.  However, units shipped to Mexico have been primarily BB2 in a somewhat stripped down form.  Lower priced unit shipments to Australia this quarter should be quite small and have little impact on pricing.
  • Gaming operations revenue of $78.7MM at a 83% margin
    • Increase in average daily win given shift towards WAP
    • 250 incremental WAP placements, loss of 25 LAP units, flat standalone units
  • Other stuff:
    • R&D expense of $28.3MM
    • Selling & Admin expense of $39MM
    • D&A of $17.4MM
    • Interest income of $1MM
    • Tax rate of 37%




Growth Opportunities

  • “The new Bluebird xD platform, the customer response has exceeded our expectations. When this gaming machine receives regulatory approval with a commercial launch expected in the June quarter, we believe it should prove instrumental in keeping our momentum strong for increasing our market share based upon the high player preference and earnings performance being achieved at our beta test site.”
  • “Another favorable factor arising from our recent discussions with casino operators here is that the improved economic environment in Europe seems to be translating into an increased sentiment toward expanding their capital budgets. This is similar to what we're hearing from our North American customers.”
  • Italy:  “Much effort is still needed before the first products are placed, which is anticipated to start this summer and we'll keep you updated on our progress.”
  • “Through these two important [Italy and Australia] new market opportunities, coupled with ongoing success in Mexico and other international jurisdictions, plus the launch of our Helios gaming cabinet, we expect to continue to expand our global presence and achieve further growth.”
  • “As we received regulatory approval for WAGE-NET and our initial portal applications in the coming months and quarters, we expect to benefit from the rollout of our network gaming strategy in numerous regional and travel casinos across the country.” 


  • “We anticipate to be slightly above the top end of our fiscal 2010 operating margin guidance of 20.5% to 21%.” 
  • “Supported by the high mix of WAP units and typical seasonal influences that are generally favorably impact the March and June quarters, we expect to remain above the high end of our average revenue per day guidance and record further modest gains throughout the balance of fiscal 2010.”
  • “With the continued strong performance of our Bluebird 2 gaming machines, and the positive response by customers for the new Bluebird xD gaming machines, which will carry a premium price when launched this spring, we expect the upward trends in ASPs will continue. I'd note that the expected future ASP increase will be partially mitigated, particularly in the current quarter by the introduction of the value priced Helios gaming machines and the launch of products in Australia through a distributor. We expect the average selling price to continue to remain above the high end of our guidance of 15,000 per unit through the second half of our fiscal year.
  • “The improving trend in the replacement cycle is likely to offset the lower number of units we expect from new casino openings and major expansions compared to calendar 2009. Specifically, we expect WMS's new unit volumes to increase year-over-year in the March quarter and further ramp upwards in the June quarter reflecting; one, incremental and growing volume from distribution to new markets for WMS, such as Mexico, Class II, Australia and the launch of the Bluebird xD and Helios gaming cabinets. Two, further growth to our ship share; and three, improving -- the improving replacement cycle. Reflecting this improving trend for the second half of fiscal 2010, but also the slower pace of unit sales in the first half of the year, we expect unit volumes to be at or just below the low end of our annual guidance for unit sales”
  • “Based on positive customer feedback, we returned from G2E with an accelerated development program for certain R&D projects, including a ramp-up in the March quarter. As a result, we expect our fiscal 2010 R&D expense will run slightly higher than originally targeted which will result in R&D expenses in a range of 14% to 15% of total revenues for the full year.”
  • “I would note that in future quarters, we may see an upward bias in additions to gaming operation's capital spending as we roll out the first Bluebird 2 participation gaming machines and pursue attractive expansion opportunities to invest our capital in the Italian VLT business.”


SBUX’s fiscal 2Q10 earnings came in at $0.29 per share, beating the street’s $0.25 per share estimate.  The company reported 7% same-store sales growth in the U.S and internationally, implying a 250 bp sequential acceleration in 2-year average trends in the U.S. and 150 bps internationally.   Traffic improved in the quarter.


Consolidated operating margins improved 540 bps YOY, reflecting the 740 bp margin expansion in the U.S. and 410 bp growth internationally.


Based on these better than expected results, SBUX raised its full-year 2010 guidance:


EPS: $1.19-$1.22 (from $1.05-$1.08)

Same-store sales: up mid single digits (from modestly positive)

Revenue growth: up high single digits (from mid single digit growth)

Operating margin:

U.S.: 15% to 17% implies 400 to 600 bps YOY growth (from 400 bps)

International: 8% to 10% implies 180 bps to 380 bps YOY growth (from 200 to 250 bps)

CPG remained the same at 35%

Consolidated: 12% to 13% (from 11% to 12%)


Howard Penney

Managing Director


Charting Inflation's V-Bottom

We’ve had plenty of mail on Q2 Macro Theme call, Inflation’s V-Bottom.  Some are convinced that Bernanke’s inflation calculations are right and that we should take the US government’s word for it when it comes to its inflation forecast. We are thankful that some people invest with that blind faith. Every liquid and transparent market needs the other side of a trade!


On Main Street, whether it be via a nasty consumer confidence reading this morning (ABC Washington Post weekly survey came in at minus 50 versus minus 47 last week) or via that nasty price consumers are paying at the pump, its all one and the same thing when measured by our proprietary Hedgeye Inflation Index – its inflationary.


Below we have attached the go forward expectations of inflation as measured by Treasury Inflation Protection (TIP). Wouldn’t you know, this chart looks suspiciously like a V-Bottom too…





Keith R. McCullough
Chief Executive Officer


Charting Inflation's V-Bottom - TIP

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

GS: Risk Management Update

I’ve fielded plenty of mail on this name in the last 3 trading days. The end result has been lower immediate term lows.


The stock continues to breakdown on bearish volume and volatility factors. I have no support until the immediate term TRADE line in my model that I have highlighted with the green dotted line in the chart below down at $150.98.


Real-time risk management doesn’t occur in the vacuum of theoretical sell side estimates.



Keith R. McCullough
Chief Executive Officer


GS: Risk Management Update - GS



The stock’s performance today is somewhat surprising in light of MCD’s outstanding 1Q10 numbers.


The 1Q10 results out of MCD today were nothing short of outstanding.  Same-store sales in the U.S., which have struggle recently, came in strong in March, up 4.2% on top of a difficult 5.6% comparison last year.  Management stated on its earnings call, more than once, that top-line momentum across all segments has continued in April.  The stock’s performance today is somewhat surprising in light of these results. 


Management sounded extremely positive on the call and the results warranted that optimism.  Looking at MCD’s stock chart and considering MCD’s comment that the last time quarterly U.S. company operated restaurant margin exceeded 20.4% (the company reported 20.4% in 1Q10) was in the second quarter of 1994, nearly 16 years ago, investors may be concerned about where MCD goes from here.


MCD – WHERE TO FROM HERE? - mcd stock




Comparable Store Sales charts:


MCD – WHERE TO FROM HERE? - mcd us mar




MCD – WHERE TO FROM HERE? - mcd apmea mar





The momentum seen in comparable sales trends in March is continuing across geographies in April with positive sales momentum maintained in all markets


Sharing ideas with franchisees and building the brand.  Taking the business to the next level.

Comparable sales, op income, and EPS all showed strength.



  • Later this summer launching smoothies, becoming more of a beverage destination
  • Continuing expansion of McCafe



  • Fourth tier
    • Snack offerings in UK/GER doing well
  • New sandwiches performing well across markets
  • Strong increases in extra value meal growth



  • Launching ¼ lb in Singapore
  • Value lunch driving TC and sales


Consumer relying on MCD to deliver affordability

  • Driving traffic through new products and core products
  • Convenience and look of new restaurants are driving this too



  • Australia and EU leading the way
  • 400-500 in the US this year, interior and exterior
  • China opening 150-175 new units this year


Improved perception across markets where critical mass exists

  • Strength of the brand is also dependent on great service
  • APMEA top customer satisfaction
    • China and Japan leading the way
  • US and EU also making progress in improving satisfaction scores

 In the US more than 1/3 of restaurants are open 24 hrs




  • Convenience is a key driver of business
  • Continued expansion of 24 hr service driving sales in Japan
  • Breakfast available in 75% of APMEA stores


Momentum is continuing this year

  • Value, experience, product are in line
  • Keeping financial discipline
  • Highest graded company in the space
    • Returning FCF to shareholders – 1bn in 1Q
  • Confident of achieving continued success


Chief Financial Officer

  • Plan to win continues to drive sales, guest counts
  • 1Q operating growth of 20% to nearly $1.7bn
    • Combined operating margin increased 220 bps to nearly 30%
  • Lower food and paper costs have allowed the continued expansion of margins


United States

  • Lower food and paper costs (and refranchising) helped operating margins increase to 20.4%, by 210 bps
  • Basket of goods decreased 5% in 1Q
  • Commodity outlook for the U.S. is down 2%-3%
  • “remain focused on building traffic”



  • Company operating margins increased 200 basis points in 1Q, to 17.3% 
  • Strong comparable sales in France, Russia, the U.K.
  • Lower commodity costs were partially offset by higher labor and occupancy costs



  • Company operated margins increased 200 bps
  • Lower commodity costs, operating efficiencies, positive comparable store sales
  • Benefitting from heavily franchised structure
  • The mix of APMEA’s margin was adversely impacted by the Aussie dollar strengthening



  • Improved as % of sales
  • Still expect full year 2010 G&A to be up slightly


Closing underperforming stores

  • Closing 430 stores in Japan
    • Negatively impacted EPS by $0.03
    • Expecting minimal charges for the remainder of the year



  • Timing is ideal
  • Investing on a scale that can’t be matched…
  • Reimaging over 2k units this year
    • Half in EU, 600 in APMEA, remainder in U.S.
  • Only 20% of exteriors globally are up to date
    • 40% of interiors
  • Rebuilding over 150 restaurants this year
  • Average sales lift above overall market performance of at least 6%-7%
  • Coinvesting with owner-operators
    • $150-200k
    • Remaining $250-500k from operators depending on what they need done to the units



  • 45% of total debt is in foreign denominated currency
    • Hedge vs volatility

Performance over the past quarter is a testament to the alignment of the system in a challenging environment.





Q: In Europe and US, how does check break down? Was traffic above SSS and check below? You think that check can improve in the year? Any pricing this year?


A: Has been a fall off in check, particularly breakfast, due to how menu is being presented. Still holding the line on pricing. 

Seeing an even larger % of sales growth being attributable to guest counts, which are tremendous. That’s what the focus is. TC’s were 50% of the comp growth in Europe.



Q: US business and the acceleration in the comps in March, positive tone in April…is core consumer feeling better or is it MCD?


A:  Consumer confidence scores getting better, more spending in the marketplace. Unemployment is in a tough spot and spending won’t pick up meaningfully until jobs come back. Results are because of strategies around value – which remains the most important thing to MCD guests. As much about strategies as it is the improved state of the consumer.



Q: Commodities?


A: Probably seen the best quarter in the year in terms of the first quarter.  Expect it to continue to be favorable and that will allow us to wait to take price whereas others will be under pressure.



Q: Drive through in China? Outlook there?


A:  Development in China…beginning to understand how to develop drive thru’s in out rings where you have less density but where you have car traffic.  Tremendous opportunity to grow the business along with growth of free standing units.

Some of the best customer satisfaction scores in China and the structure of the organization there is performing well.



Q: How sustainable is the March pickup? On the smoothies, will they be ready in time for national advertising over the summer?


A: March was a good month.  Growth in all day parts for the entire month.  Momentum is continuing into April.  Broad based across the items…frappes were a part of it.

Frappes are in 9k restaurants and the performance expectations are exceeding what we thought they would.  Smoothies will be ready for national advertising.  Already in 2k units.  Hearing strong reports from operators.



Q: How do you guys manage the cost down so much with inflation in so many proteins…how does that give you a pricing advantage over time. 


A: Great supply chain at MCD. Some fixed price contracts, some options, some forward buying…and we can negotiate good pricing with the relationships we have.  Important for owner/operators to be clued into promotions coming in the next 6 months to mitigate impact on margins and be proactively prepared.   The product mix can be helped by higher margin products/promotions that support the company relative to the overall food cost



Q:  The cost of remodels…between 4 and 7 thousand?


A: This is the first time that MCD has given guidance on what the costs are going to be.  Hard to come up with an average cost across 6k US units of varying sizes, ages, and owner/operator preferences.  Doing interior and exterior gives a significant lift to sales.  Even at higher end of range, we’re seeing returns in the low double digits in the first year, cash on cash.  We feel confident in the level of investment and sales expectations will warrant that investment.



Q: April?


A:  Won’t be lower than the quarter – so the floor is 4.2%



Q: On the U.S., breakfast dollar menu, can you give mix on that…impact to margins? Competition? Also, in terms of returning cash to shareholders? Refranchising?


A: We’re at 80% in terms of franchising.  Optimizing portfolio around the world for how we perform.  On the breakfast mix…we’re selling more coffee.  $ menu is sausage biscuit, sausage muffin, hash brown, and coffee (then other menus that were already on there).   Low cost food and paper in these products. All in all we’re really pleased and the goal was to recapture guest counts.  Food at home down 2%, food away from home at 3%, we can’t take a lot of price.  Happy with breakfast TC’s.



Q: Metrics on beverage mix? How coffee has performed? Where was the beverage mix 3 or 4 years ago, today, and where is it going? Healthcare reform on corp and franchisee level?


A: On healthcare, 2014 is implementation.  Franchisees are a federation of small businesses.  It will vary by number of fulltime employees? 90 day waiting time to enroll, allowance, that helps when operators are evaluating whether someone is going to be fulltime.  $10-30k per store.  TBD.

Corporate level won’t be impacted. 



Q: On Japan, profitability of the stores that are being closed over the next year or so? Any guidance on how to think about contribution from Japan to equity income?


A: No real impact from the closures. 30 got closed so far.  While they were lower volume and return, there was no significant impact.  Not a significant drag.  There will be some sales transfer, higher performing operations to being with. 


The closures were restaurants that were size and logistically constrained.  Inhibits menu innovation. April 25, reopening some stores in Tokyo and those stores will be very iconic in Japan.  We will see that market begin to turn.  Got to get rid of some older constraints within system.



Q: 150-200k total on reimages? Talk about return…as you coinvest how does that impact franchise margin versus how it worked for older reimaging programs? Anything noticing in speed of service? Discounting levels compared with 6/12 months ago? Why would you push franchisees to let up on discounting when it’s defending traffic when they have margin risk?


A: Investment…we had a fixed amount during the older programs – 85k – we thought it would be 170k each total. Franchisees ended up spending 250k because they saw other stuff they wanted. Now we’re looking at 40 percentile of the lease hold improvement.  This time, there is a broad range; restaurants have different needs- inside, outside, signage…

Speed of service hindrances have not been observed.  Drive through capacity has been adjusted and service is still as fast as it ever was.  Doing well on that end.


Discounting level…we have consistent value across the year.  That allows us to ingrain it in customer and talk about frappes or smoothies or angus, we’re not jumping in with promotions here and there, we are consistent.

And on the coinvesting, where you will see that show up will be in additional depreciation on the franchise margin line



Q: McCafe expansion in Europe still doing well?


A: Pretty much…sales performance is strong.  Germany and France performing well.  France is reimaging exteriors in 2010.  In US, espresso drinks are given through drive thrus and over the counter…



Q: Plan to win has been a success…over the years we’ve heard about McGriddles, drinks…how do you guard against mistakes and increasing complexity in the back of the house with new promotions?


A: We stay focused on the future, focusing on food development protocols…innovation labs…very deliberate process. We don’t move forward with anything not completely tried and tested.


Investment in process and execution of operations has also picked up very much versus 8 years ago.  Plan to win focus is what’s helping today and the reinvestment and infrastructure that has been established is the difference that is often missed



Howard Penney

Managing Director


Gaming revenues tracked through April 19th of HK$8.1bn and other tidbits we picked up this week.



We think Macau gaming revenues were HK$8.1bn through April 19th which puts the full month on the pace of a little over HK$12bn.  On a year over year basis, Macau is looking at around a +50% month off of an easy -7% comp last year.  Total gaming revenue was up 66%, 73%, and 42% in January, February, and March, respectively.


April growth looks strong.  Foot traffic has been good.  One caveat is that we heard volumes at LVS were not as strong as win due to higher than normal hold percentages.  We are trying to get a feel for the luck factor at other properties.  Going forward, with a full Golden Week (9 days vs only 3-5 last year because of financial crisis) May should be another strong month.  Also, Wynn Encore opened this week which should boost volumes but potentially hurt same store results.


In conjunction with the Wynn Encore opening this week, the company announced the development of Wynn Cotai with an opening timeframe of early 2013.  The sense from people on the ground in Macau is that early 2013 might be a bit aggressive but Wynn may be trying to appease the government. 


Here are some initial thoughts on Wynn Encore:

  • Given the day of mourning in China they don’t expect PR to be as aggressive but volumes shouldn’t be impacted that much.
  • Claim that Encore isn’t assuming any dilution in win per table… taking some of Starworld’s VIP business – but it’s hard to know
  • Our guy thinks that win per table will be down though (although hold comps were easy last year). 
  • Margins should get thinner – since VIP will become a larger % of total profits at the property
  • Mass numbers should drop as a result of credit falling away for premium players – and a lot of Wynn’s Mass play is “premium mass.”  Unclear if the new offering will help them – a lot of that will be impacted by credit policy

Other tidings:

  • Grand Lisboa's head of table games and  VP casino manager are leaving and going to Galaxy Cotai.
  • No word on visa restrictions. There are talks of additional tightening on the mainland – but nothing has happened.

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