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R3: The Real Question to Be Asking about Europe


April 30, 2010





We definitely saw a meaningful divergence in Timberland’s European results vis/vis what we should be seeing based on the underlying macro climate. The company noted that every single country in the region posted growth in its most recently completed 1Q.  This is the exception – not the norm. Several people have asked me if we are hearing of any weakness overall in Europe given the volatility in financial markets. While I have not ‘heard’ of things slowing down en masse, I think that  by the time any of us ‘hear’ about any broad-based weakness, it’s probably too late. Let’s accept the premise that things will slow – and anyone who is exposed to Europe that does not at least prepare for this coming down the pike from a risk management standpoint opens themselves up to a very big day of reckoning. In other words, the questions that we should be asking managements are “what are you doing to prepare for a potential slowdown” instead of “have you started to see any weakness.”





- While some supermarket bulls have been eagerly awaiting the arrival of inflation to help reverse negative sales trends for the traditional grocers, Safeway articulated that is not able to pass along price increases in certain key categories.  CEO, Steve Burd, noted that milk, eggs, and meat are categories that are still being promoted heavily to attract traffic, and therefore recent cost increases are not being matched with commensurate or even greater increases in retail prices.  Sounds like non-traditional grocers still have the upper hand competitively.


- In a unique collaboration, Fruit of the Loom and Amazon.com joined together to launch an innovative bra.  The innovation stems from the option which allows a woman to choose the left and right cup size independently, with each half costing $5.  While the product itself is unique on a mass level, it’s even more interesting to see Amazon as the online distributor of the product while Wal-Mart is bricks and mortar partner.


- Office Max noted that April trends are tracking below Q1 results as well as March.  However, when asked about what may be the cause of the sequential  slowdown, management was unable to fully articulate the key factors.  Instead, we were reminded of how the recovery is not linear and will be filled with “peaks and valleys” along the way.  In other words, small businesses still remain under pressure.





R3: The Real Question to Be Asking about Europe - Calendar





JNY in the M&A Rumor Mill - Jones Apparel Group Inc. could be close to a deal to acquire a stake in Stuart Weitzman. People familiar with the matter said that a deal between Jones and Irving Place Capital, Weitzman’s minority investor, could happen as soon as today. There is also some speculation that Jones could acquire more than Irving Place’s 40% stake. One investment banker said negotiations between Jones and Weitzman have been going on for a while. Weitzman himself has been very vocal about finding a succession plan. The founder, 68, is actively searching for a CEO and a president of retail. <wwd.com/footwear-news>


NWY Declares a New CEO for Next Year - Gregory Scott, a former chief executive officer of Bebe Stores Inc., will succeed New York & Company Inc. chairman and ceo Richard P. Crystal, who is retiring when his contract expires on Feb. 11. Scott, 47, will become president of the chain on June 1, and ceo when Crystal leaves. Scott will also join the board. The last president of New York & Company was Ron Ristau, who left about a year ago and was primarily an operations executive, rather than a merchant. Crystal, 65, assumed the responsibilities of president without taking the title. <wwd.com/business-news>


Beauty Giants Upping Ad Spending - The giants of the beauty world are priming their promotional pumps as they look to grab market share in an improving world economy. Procter & Gamble Co. attributed part of the 7.4% revenue gain in the third quarter to more aggressive advertising spending, much of it tied to the “Thank You, Mom” campaign run during the Winter Olympics and Paralympics which included 18 of the consumer products giant’s brands. In the U.K., Unilever said its advertising and promotional spend, as a percentage of sales, increased 220 bps in the period and advertising and promotional spending would be “comfortably ahead” for the full year. Revlon Inc. plans to augment sales growth through advertising in the current second quarter as the firm refines its focus “to build the brands we have today,” according to Alan Ennis, president and chief executive officer. The Estée Lauder Cos. said it would increase advertising, in-store merchandising and product sampling by 35% in the fiscal year’s final quarter as the firm seeks to encourage consumers to return to luxury products. <wwd.com/business-news>


Amer Sports Sees Winter and Outdoor Grow, Fitness Decline - Amer Sports Corporation's net sales reached €372.6 mm in the first quarter ended March 31, 2010, up 5% from the same quarter a year ago. Sales rose 11% in the Winter and Outdoor segment and 2% in Ball Sports, but declined 5% in fitness. <sportsonesource.com>


Germany's Metro Group Department Store Profitable - The Metro Group returned to profitable growth in Q1 for the first time since 2008. The German cash & carry, department store, hypermarket and electronics retail group reported net profit of 3 mm euros compared to a loss of 75 mm euros. EBIT more than doubled while sales grew 2.3%  <wwd.com/business-news>


Australia's Woolworths Cuts Growth Forecasts - Woolworths Ltd. cut its annual sales growth forecast because of lower food price inflation and the absence of government cash handouts that stoked demand a year earlier. Revenue may rise 3% to 6% vs. Feb. 26 announcement of sales growth in the upper single digits. Australia’s government distributed more than A$10 billion in cash to families in 2009, stoking sales of clothing, groceries and electronics, as the country sought to avoid recession. As Woolworths’ growth slows to below second- ranked Wesfarmers Ltd. for the first time in five years, it’s also seeing food prices rises stop. <bloomberg.com/news>


Japan's CPI Falls 1.2% in March - Japan’s consumer prices fell for a 13th month in March, indicating the economy remains hampered by deflation even as the export-led recovery starts to spread. Prices excluding fresh food slid 1.2% from a year earlier, after dropping 1.2% in February. Bank of Japan policy makers will probably predict today that consumer inflation will improve to at least zero for the year to March 2012, according to 14 of 16 analysts surveyed.  <bloomberg.com/news>


Jarden Corp Grows 4% in Q1 – Sales grew 4% to $1.19 bn for the entire company, which operates three other segments that make small kitchen appliances and other home consumer products , including Oster and Mr. Coffee, Ball canning jars, Bicycle playing cards, and First Alert home safety products. Jarden Corp’s Outdoor Solutions segment generated sales of $614.2 mm in the first quarter ended March 31, up 3.9% from $591.3 mm in the same quarter a year earlier. The unit’s brand portfolio includes Abu Garcia, Campingaz, Coleman, K2, Marker, Marmot, Penn, Rawlings, Shakespeare, Stearns and Volkl. <sportsonesource.com/news>


Vail Resorts to Purchase 30% of Specialty Sports Venture - Vail Resorts Inc. agreed to purchase the remaining 30% it doesn't own to take full control of the Specialty Sports Venture group of retail stores. The retail joint-venture includes Boulder Ski Deals, Colorado Ski & Golf and Bicycle Village. Both Tom and Ken Gart will be leaving their leadership positions with Specialty Sports Venture. <sportsonesource.com/news>


Callaway Swings 11% Sales Growth in Q1 - Callaway Golf Company reported that net sales for the first quaretr of 2010 were $303 million, an increase of 11% as compared to net sales of $272 million for the first quarter of 2009. <sportsonesource.com/news>



The Macau Metro Monitor, April 30th, 2010


SINGAPORE NO MATCH macaubusiness.com

SJM CEO Ambrose So said Singapore’s gaming project will be no match for Macau. “I don’t think that it will have too much impact on Macau. Singapore is a financial center and gaming business there is only a part of the overall tourism industry,” he said. He added, “I don’t think Singapore would like to develop gaming business like Macau does, as its main industry,” 



The Singaporean government has stringent rules against junket agents. For junket agents, obtaining a license in Singapore requires extensive financial and personal disclosure. Operationally, junket agents need to store full records in Singapore and disclose benefits given to their customers. So far few junket operators have shown interest.

Perhaps the biggest crimp on premium business is the advance reporting requirement. Casinos must report the arrival of junket customers three hours before they enter Singapore. Premium players generally crave privacy, hoping to avoid questions about how much money they have, where it came from and whether taxes were paid on it. But the city-state's rules on junkets run counter to its tax regime. The Lion City taxes premium play at 12%, compared with 22% for mass market gaming revenue, and 39% across the board in Macau.


LVS chairman Sheldon Adelson downplays the lack of junket operators. "We are offering clients credit," he said at Tuesday's MBS opening. LVS president Michael Leven added: "We intend to run this business without junket operators as we do in Las Vegas. Assuming our process works, it will be more profitable."


Total employment in Singapore is estimated to have grown by 34,000 in 1Q 2010. The seasonally adjusted overall unemployment rate dipped to 2.2% in March 2010 from a revised 2.3% in December 2009.

The service sector gained 31,200 workers in 1Q 2010, compared to 31,500 additional workers in the previous quarter. Manufacturing saw a second consecutive increase adding 3,400 workers after shedding workers over four consecutive quarters, while construction registered a small decline of 800 workers after 20 successive quarters of employment gains since 2005.

Good Guys

“Associate with men of good quality if you esteem your own reputation; for it is better to be alone than in bad company.” 

-George Washington


Are you a good or a bad guy? It’s a question that all guys know the answer to, but no guy gets to answer for himself. Unfortunately, in the culture of ‘how much money do you make’ versus ‘how do you make your money’, some of the bad guys in this business are now making us all look bad. Being painted with a broad brush can be frustrating.


Some of the Wall Street You Tubing and email gotchas that have been captured in recent months are just plain un-American. Sure, some of these politicians and financiers can lock themselves in their Connecticut compounds and never be accountable or show their faces, but they definitely won’t be the guys who show their sons the way to survive the risk management exercise of not getting a bloody nose at recess.


What I am looking for in America is for the good guys and gals in this business to rise up above their compensation insecurities and make a stand. It’s one thing to wake up every morning knowing you are a good guy; it’s entirely another thing to have a bad guy pay you off to keep your mouth shut.


I’m Canadian. My son seems like he has a shot at being a good guy. He’s American. Before he has to deal with who is and who is not a good guy in this world, he will be well versed in respecting the history of all the men and women who made this country great.


One of those guys is George Washington and his aforementioned quote about the quality of men speaks for itself. On this day in 1789, Washington was made the first President of the United States of America. He was sworn in at Federal Hall in the city where guys need to start stepping up to the leadership bar now – New York City. To all the good guys on trading desks, offices, and cubicles in NYC, it’s time.


This morning, on the heels of overnight news of a “criminal investigation”, populist crowds are going to be calling out everyone at Goldman Sachs a bad guy. At the same time, Bank of America is downgrading Goldman from whatever their compromised and conflicted ratings mean to something less positive. All of this populism and posturing, when painted with broad strokes, reaches new heights of American hypocrisy.


There are good and bad guys at GS. There are good and bad guys at BAC. There are good and bad guys in your office. There are good and bad guys all over the world. This is not a time to be pointing fingers anymore. It’s time for the good guys to raise their hands, be accountable for the bad behavior of their teammates, and start taking on some real-time responsibility to change this mess.


That’s it. Had to get that off my chest.


Back to Grinding Lemmings:

  1. Immediate term levels of support and resistance for the SP500 are now 1190 and 1217, respectively.
  2. Immediate term levels of support and resistance for GS are now $151.11 and $164.98, respectively.
  3. Immediate term levels of support and resistance for BAC are now $16.78 and $18.91, respectively.

I shorted BAC in the Virtual Portfolio yesterday, primarily because the math told me too; but also because our head of Financials research here at Hedgeye, Josh Steiner, agreed that these allegations of bad guys doing bad things isn’t just about Goldman. It’s about our profession.


If we are headed down the path of criminal investigations rather than civil ones, I can assure everyone in America of this: there is a small number of criminals working on Wall Street, and they will be smoked out of their holes. Everyone in this business knows who the bad guys are. It’s time.


They can send me hate mail. They can remind me that Carl Levin doesn’t know what market makers do. Been there, done that and I get both. They can do whatever so inspires them to live in the shallow and dark halls of opacity. My front door is open here this morning in New Haven, Connecticut and I employ a full house of good guys and gals who will be standing on the front lines of whatever it is about transparency and trust that they stand against.


We stand for re-building the credibility of America’s financial system. It’s time to lock arms with the good guys of Wall Street and play Red Rover. From New Haven to New York, please stand with us and begin to form the line. As Washington said, it’s time to “guard against the impostures of pretended patriotism.”


Have a great weekend with your families and friends,



Good Guys - wash

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Higher direct play, lower "all in" commissions, and hold percentage drives margin and EBITDA upside in Macau.  Estimates need to go higher.



While Vegas was almost exactly in-line, WYNN put up a blockbuster quarter in Macau. A lot of it is sustainable. Net revenues were higher than we projected in Macau but the real story was margins. Part of the higher margins was related to better than expected hold percentage on both VIP and Mass. However, direct play was better and the rebate percentage was lower, both of which skewed our margins. We were using a 44% rate to model “all in commissions” which doesn’t take into account the direct play that gets rebated at a much lower rate – let’s say roughly 30%. If we adjust our model to reflect the direct play rebates, our 2010 Wynn Macau EBITDA estimate could go to a range of $650-700 million.


Here are the details:

  • Our net revenue estimate was $36MM below what Wynn Macau reported – the entire difference was due to the rebate rate being 0.8% vs. our estimate of 0.9%.
    • The rebate rate is meant to be an estimate of the commission rate that actually goes back to players in the form of a rebate versus the part of the commission that goes to junkets.  In 2009, the rebate rate was 88bps. However, it was skewed by a 1.13% rebate rate in 1Q09 that resulted from the huge 3.6% hold that property experienced.
    • Rebates averaged 30.3% of win in 2009 up from 28.5% in 2008 and 27.8% in 2007.
    • Assuming a normal hold rate of 2.85%, rebates should theoretically be 86 bps.
  • RC volumes were $20.2BN vs. our estimate of $20.6BN.  Therefore, our hold percentage estimate was 10 bps light of the Wynn actual hold rate.
    • We estimate RC volumes using our proprietary database and adjust for the historical difference between those numbers and what Wynn reports. Usually all or part of direct VIP play is excluded from the numbers we receive – so there is always some guesswork involved in calculating the correct RC and hold %.
    • The net effect was that we estimated $536MM of gross VIP win and it was closer to $545.
  • Our estimate of Mass win was spot on but the hold percentage was better, hence better flow-through to the bottom line.
  • Most of the upside came from a total commission rate of 40% vs our estimate of 44% - Higher mix of direct play certainly helped, but the bigger picture is that we need to consider going forward that given Wynn’s high percentage of direct play (guessing around 20-25%), that even if they are paying 44% or more on revenue share deals to junkets, the rate on direct play is considerably lower and therefore the blended rate should probably be closer to 40%.
  • The increase in retail, which is almost all cash business (i.e. not comped) also helped EBITDA by a few million.


Hegel was right when he said that we learn from history that man can never learn anything from history.

~George Bernard Shaw


Yesterday, we shorted the SPX as the market rallied back up to our immediate term resistance line.  That being said, in the absence of remarkably negative news, the market continues to show resiliency.  The S&P 500 finished higher for a second straight session on Thursday (up 1.94% last two days).   The interconnected MACRO environment remained the primary driver for sentiment and stocks. 


For the time being, European Sovereign Debt concerns continued to dissipate on heightened expectations that the EU/IMF aid package for Greece will be the panacea the country needs.  At Hedgeye Risk Management, a historical perspective is an important component of how we view the market.  As such, we have a different view of how the Domino Effect of Sovereign Debt will continue to play out. It will not end as well as some may hope.


The waning RISK AVERSION trade helped put the focus back on the earnings season, where the news cannot get much better.  Yesterday, the VIX was down 12.5% and is now only up 12% on the week.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.27) and sell TRADE (19.42).


This past week initial jobless claims fell 11,000 to 448,000 from 459,000 (revised up 3k), which brought the rolling four-week average higher by 1,500 to 462,000. Our Financials analyst, Josh Steiner wrote yesterday - “As we said last week, there has emerged a clear divergence between the claims trajectory that dominated 2009 and the trajectory that has been in place year-to-date.  We remain concerned that without improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 50-75k above that level - exactly where we've been for five months now.”


Despite some emerging concerns, the Financials (XLF) was the best performing sector yesterday.  The banking group was a big gainer with the BKX +2.4%, as the investment banks also performed well with GS up 2.1%.  It was rumored that GS may pursue a settlement with the SEC. The asset managers continued to outperform, while Insurance stocks put in a mixed performance. 


Treasuries were stronger yesterday despite the move in stocks as the dollar index declined 0.46%.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.56) and sell TRADE (82.51). 


After underperforming earlier in the week, the Consumer Discretionary (XLY) outperformed yesterday, rising 2.2%.  The earnings season provided the catalyst for the positive sentiment.  HOT was a big winner in lodging and extended its recent run-up after posting much stronger-than-expected Q1 results.  The Homebuilders, Retail and Restaurants also contributed to the outperformance. 


Dragged down by earnings and a weak Chinese market, the REFLATION trade underperformed yesterday.  XON helped drag down the Energy (XLE), despite crude rising 2.3% on the day.  Natural Gas declined 8.5% following a larger-than-expected inventory build and was a headwind for some of the E&P and coal stocks. The oil services group also came under some pressure with the OSX (1%).  Crude remains in a BULLISH formation and the Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.11) and Sell TRADE (85.79).


The Materials (XLB) also underperformed as both copper and gold declined yesterday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,153) and Sell TRADE (1,176).


Copper traded down another 1% yesterday and is now broken on TRADE and TREND.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.52).


In early trading, equity futures are trading above fair value as markets are more focused on the corporate earnings picture.  As we look at today’s set up the range for the S&P 500 is 27 points or 1.4% (1,180) downside and 0.8% (1,217) upside. 


Today’s MACRO events: 

  • Q1 Advanced GDP
  • Personal Consumption
  • Core PCE
  • Employment Cost Index
  • Apr Chicago PMI 
  • Apr Final U. of Michigan Confidence 
  • Apr NAPM Milwaukee

Howard Penney

Managing Director














As we expected, BYI lost ship share in North America but quarter was in-line with pre-announcement.



BYI reported FQ3 largely in line with our expectations.  Equipment revenues were weak, due to lower ASP's that were a result of larger than expected shipments to international markets (which also have some recurring revenue components - i.e. Mexico).  North American shipments were weak as we suspected, and as a result, BYI lost ship share in the NA.  Lost ship share should be temporary due to the introduction of a new cabinet and many new titles will ship over the next 2 quarters. Equipment weakness was somewhat offset by strong margins which the company attributed to manufacturing efficiencies and lower material costs.  We suspect a higher mix of conversion kit sales helped a bit as well.  Gaming operations was surprisingly strong, especially given the impact of Alabama.  As expected, systems sales were weak but margins were strong due to the skew away from hardware sales.


We may have more color post the call. For now, below are our notes from the conference call.



  • Recurring revenue was 47% for the quarter compared to 45%
  • Fewer game sales should be deferred going forward, given the change in software accounting rules
  • North American ship share was 15% for the quarter
    • Partly blamed IGT's discounting
  • Expect effective tax rate between 34-36% due to higher income levels in lower tax rate jurisdictions
  • Expect to record a $18-20MM gain on the sale of Rainbow
  • Well-positioned to accelerate share repurchases under the new $150MM plan
  • Leverage ratio is well under 1x
  • Continue to use working capital prudently to help operators finance purchases
  • Remain optimistic that a replacement uptick will occur in the near future
  • NA replacements: 2,236 were replacement sales
  • Alpha 2 release timing seems to have impacted their ship share
  • International sales were driven by strong sales to Asia and Latin America
    • We suspect Mexico was very strong - they also earn recurring revenue there
  • Italy: 57k games should be deployed over the next 12-18  months. Have executed contracts with 2 distributors for 3,600 games and systems
  • Excited about Class III shipments to Mexico and re-entry into Australia
  • Gaming operations negatively impacted their revenues in Jan & Feb
  • Early indications that Cash Spin will surpass other popular Bally games
    • Most successful launch in their entire history
  • Expecting excellent net new placements in gaming operations this year
  • Expanding their position in Mexico
  • Trial units in Australia are performing well
  • Systems was negatively impacted by delays in several projects (MBS)
  • During the quarter they signed a corporate wide agreement with ISLE (switched from IGT)
  • Have won every Table View contract they have competed for in PA
  • Expect wide implementation of iVIEW DM this year and will release multiple applications to run on iVIEW
  • There will be opportunities in Canada in the near future
  • Will give more thoughts on FY2011 on the next call


  • Don't plan on discounting, it's not a great strategy and short-sighted
  • Launch of Alpha 2 ProSeries cabinet - exact timing? 
    • Ship a few by end of June quarter.  Book of business for June Q is better than last quarter
    • Think that by next year most of their shipments will be Alpha 2
    • ASPs will be higher too and help margins
  • Gaming operations saw in increase in centrally determined games despite removal of Alabama
    • Saw growth in Washington
  • Also saw growth in premium products
  • What was the Alabama impact  (2-3 cents/ quarter)
    • less in the 3Q since all the games were not offline the entire Q
    • Country Crossing was removed - the ones that are operating are in the system
  • In Italy some of those units are for sale, some are for participation.. there are also system recurring revenues.  The daily rates are lower than normal but they are locked for a long period of time allowing them to recoup their investment handsomely. They also get small daily system hook up fees.
  • Added more daily fee than participation games to their premium games
  • Canada:  Expect 4-6 of the provinces make systems procurements over the next two years.  They are also going to make large VLT purchases anywhere from 6-14k games per province
  • WAP / LAP breakout: Have million dollar link and quarter million link coming out - so 2 over the next 12 months. 985 WAP/ 25 LAP
  • $6.5MM of maintenance capex in the quarter

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