As predicted in my 7/30/08 posting “MGM: Q2 DOESN’T MATTER BUT EVERYTHING ELSE DOES”, MGM’s Q2 was not that bad. My issues continue to be prospective of Q2. Operationally, ADR’s and slot revenues are the metrics to watch to gauge the true health of the business. The trends there are not good. In Q2, MGM’s slot revenues declined 10% and ADR’s fell 5%. I believe these metrics will continue to deteriorate, especially room rates.

The company missed EBITDA and EPS estimates only slightly so the stock is up 6%. In its press release, management played up the occupancy stat as an indication of strong demand for the company’s Las Vegas properties. It’s funny how when times get tough occupancy becomes the selling point to investors. News flash: occupancies are always high in Las Vegas. Strip hotels will do anything to fill their rooms because they need to leverage that big fixed cost asset known as the casino. As I’ve written about extensively, room rates will always be sacrificed.

Real demand as measured by room rates and slot revenue is deteriorating. Unfortunately for MGM, these are also the two highest margin revenue drivers on the Strip.

"Real" demand in decline

European Retail Sales Get Ugly

It’s a trailing economic data point, but is it ever an ugly one. Retail Sales for the Euro Zone for the month of June were the worst since the data started to be compiled for the region in 1995.

Yes, in context, we economic historians have to remember that the 15 member Euro Zone region does not have aggregated data that spans across decades. This of course is a major problem, when we look to compare their consumer spending cycle, in the aggregate, with that of the 1970’s. Regardless, at -3.1% year over year (see chart), this June report needs to be respected, particularly if it a leading indicator of negative US consumer spending months and quarters to come.

Research Edge Chart by Andrew Barber, Director

Philippines Inflation Running Rampant

The Philippines reported another nosebleed inflation number for the month of July today, at +12.2%. Since their central bank interest rate is still under 6%, they’ll need to raise rates further, or risk a wage spiral.

Unlike here in the US, wage inflation in Asia is a major problem. While the commodity component of July inflation has deflated, the wage component of the Asian equation continues to accelerate. This is a secular “Trend”, not a cyclical one.

Whether or not the Philippines PSE Composite Index has priced in this wage spiral risk is obviously the question from here. Since October 8, 2007, the Philippine stock market has lost -33% of its value (see chart below), and remains comfortably in it’s down “Trend”.

  • PSE Composite Chart - Round Trip!
chart courtesy of

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US - Officials in Buffalo are reported to be devastated by the announced closure of one of the town's largest employers as Tyson fails to renew its contract with Petit Jean. The Petit Jean Poultry plant in Buffalo will close by 4 October, eliminating about 465 jobs in Buffalo (population about 3,000), reports News-Leader of Springfield, Missouri.

CBRL – Top-line trends are stabilizing

CBRL’s July same-store sales were down 1%, driven by a 3.9% increase in average check and a 4.9% traffic decline. On a two-year basis, comparable sales were up 0.3% in July from a slightly negative number in June. Although these results are not good, it does show that top-line trends are stabilizing. Additionally, the company’s full-year same-store sales result of up 0.5% met CBRL’s updated guidance provided in early July.

CBRL’s 4Q comparable sales number of down 0.8% highlights Brinker’s Chili’s outperformance, which reported an acceleration in same-store sales growth trends this morning for 4Q, up 3.4%.


Leapfrog reported a very nice quarter last night. Virtually all key metrics turned positive or confirmed a positive trend. Revenues grew for the first time since Q2 2005 and average inventory days outstanding shrunk for the 3rd straight quarter. The margin picture looks good as well. Gross margin expanded 310bps in Q2 and the SG&A ratio declined 11.5%. EBIT margin increased for the 3rd straight quarter, up 22%.
  • Clearly, management’s long-term strategy and implementation is finally paying off. We introduced LF on our portal in our 6/26/08 posting “LF: A HOP BACK IN ITS STEP” and the company hasn’t disappointed. New products (with higher margins) are off to a great start, impacting revenues about a quarter earlier than expected. Tie ratios should improve gradually, driving gross margins higher. After years of heavy SG&A spend, the company can now dial that down a bit with the exception of advertising. Consistent with Q2, accelerating sales will leverage SG&A nicely.
  • Despite the strength of the quarter, management left its guidance unchanged for the year. The bears will say that sales were just pulled forward into Q2. I disagree. Management is being appropriately conservative given the consumer environment. Don’t be surprised if they continue to beat their guidance though. LF is probably less dependent on the economy given the fully revamped and reloaded product offering. They’ve barely scratched the surface with their new products internationally. That’ll change in the back half of 2008. Domestically new products are still being rolled out with significant advertising support.
  • Concentrating the long side of your consumer portfolio on names less tied to near term economic factors like LF seems to make a lot of sense in this environment.

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