Three Word Phrases

“In three words I can sum up everything I've learned about life: it goes on.

-Robert Frost


At Hedgeye Risk Management, the number three is very important to us. …if you did not know it, you do now.


I like the sound of three-word phrases; “Fools Rush In,” “Greed is good” and “Character is Destiny.”   The last one comes up a lot when someone makes a mistake and can’t own up to it or is not held accountable for his or her actions. 


The SEC will probe the cause of yesterday’s electric trading malfunction, but we will likely learn that some overpaid MAWG (middle-aged white guy) has a “big fat finger” (love those three-word phrases).


Last night after settling in from just a crazy day, I turned on the TV.  Yes, it was on CNBC (Comcast does not have Bloomberg in my neighborhood).  Staring me in the face was another one of those three-word phrases - “Markets in Turmoil” - the CNBC special report.  The network altered its programming to produce a special report on yesterday’s price action.  I get it, yesterday was a crazy day but to perpetuate a market correction in this manner - seriously?  It was unwatchable. 


In my career, I have seen more than my fair share of days like yesterday and I will not forget any of them.  Given the speed and magnitude of the drop, it was clear that the price movement was not normal.  In a matter of minutes, Accenture did not go out of business and P&G was not suddenly worth 40% less.  Electronic issues aside, what’s important is the reason for the market decline.     


As a firm, we are positioned perfectly for a difficult May, with two of our three key themes for Q2 (April Flowers/May Showers and Sovereign Debt Dichotomy) playing out on the big screen.  Notwithstanding the potential for a MAWG with a fat finger, the market correction is perfectly normal and we are not crashing.  That is not to say we don’t have issues to deal with, we do, but it’s not 2008 all over again. 


This week’s RISK AVERSION trade has seen the dollar index move up 3.7%, which is a move in the DXY we have not seen since October 2008.  The VIX closed at 32.80 and has also seen a spectacular move this week, up 45%.  The VIX would need to go up another 140% to be at the same level it was at in October 2008. The Dollar is a safe haven for now, but our balance sheet is like “Kissing a PIIG” (think three-word phrases). 


In keeping with the Hedgeye transparency mantra, yesterday at 11:29 AM we shorted the Dollar index (UUP).  As Keith posted yesterday, we have been bullish on a “Buck Breakout” since the beginning of the year but, for a TRADE, the buck stops here.   We are shorting high as US debt issues aren't going away either.


While we are not crashing in the US, the Chinese market is close.  Last night the Chinese market was down another 1.9%, bringing the year-to-date decline to 18%.  The Chinese government is proactively slowing an economy that is white hot, but the country’s economy and its balance sheet is the strongest on the planet (For full transparency we are long the CAF).     


This is in contrast to the US economy and balance sheet, which is in very poor shape.  I wrote a MACRO note the other day that focused on the “sustainability” of the US GDP figures.  I use the theory of sustainability when analyzing stocks and, applying the same thought process to the US economy and its balance sheet, the trends are unsustainable.  Given this and the right price, it’s not a bad idea to be short the US dollar…which leads me to our new favorite three-word phrase, “Bernanke Stands Alone.” 


Yesterday, the head of the ECB, Jean-Claude Trichet was one of the last central bankers to come around and admit that inflationary pressures are real.  His two key quotes were “Inflation higher than expected due to oil” and “global inflation pressures may increase.”  How long can Mr. Bernanke stand alone and claim not to see the threat of inflation? 


The market is “correcting not crashing” and CNBC wants to perpetuate the turmoil because their viewership is falling faster that the market did in 2008. 


In closing, the most important three-word phrase of the weekend is “Happy Mother’s Day.”


Function in disaster, finish in style.


Howard Penney

Managing Director


Three Word Phrases - S P


The big market drop could be a correction, not a contagion


LVS missed our EBITDA estimate slightly but we were way above the Street. High hold % and strong baccarat volume drove LV.



"We are pleased to report that we delivered record revenues and adjusted property EBITDA during the first quarter of 2010. Strong top line growth in all our markets, coupled with increases in operational efficiency, contributed to substantial margin expansion and a record financial performance overall.  In Macau, we delivered $259.2 million of adjusted property EBITDA, with each of our properties, The Venetian Macao, Sands Macao, and Four Seasons Hotel Macao and Plaza Casino, delivering revenue and EBITDA growth, as well as EBITDA margin expansion.  In Las Vegas, increases in gaming revenue driven by record table games drop, in concert with the impact of our efficiency programs, allowed us to deliver $105.3 million of adjusted property EBITDA during the quarter, and to expand our Adjusted Property EBITDA margin to 32.3%, an increase of 410 basis points compared to the first quarter of 2009."

- Sheldon G. Adelson, chairman and CEO




  • Will shortly recommence construction of sites 5 & 6
    • Doubling the hotel inventory on Cotai is critical to growing the MICE business
  • Vegas: Forward bookings are increasing for 2010 & 2011.  Stronger pricing trends in FIT - especially on weekends.
  • MBS Singapore
    • Mostly SE visitors
    • Both premium direct and slot play have been quite robust
    • Today's visitation has been primarily from international visitation
  • Their principal focus now is growing by focusing on sites 5 & 6, recovery in Las Vegas, expansion and tables of Bethlehem and of course the maturation of Singapore.
  • Believe that the high hold at Venetian Macao on mass play should continue in the future, given the mix of games, time of play and other factors
  • Focused on growing their direct VIP play in Macau - which grew to 21% of total VIP drop at Venetian
  • Four Seasons - direct VIP play was 43% of VIP drop
  • Sands Macao remains a cash cow
  • Sands Bethlehem:
    • Had its best quarter since opening, reflecting new marketing programs and higher win per day
    • Plan to add 89 table games this summer which should increase the property's attractiveness
    • Started building hotel, which will open June 2011
  • Vegas:
    • Looking forward they should see a higher mix of group bookings in 2010 and even higher mix in 2011
    • Have 515k group room nights on the books for 2010
    • Expect pricing will improve over time
  • Deleveraging strategy:
    • Repaid $850MM of debt this quarter
    • Have $1.3BN on their credit facilities (US & SING) and $4.2BN in cash
    • Have $5.5BN of liquidity: 1.5BN left to spend on MBS through balance in 2010, but as much as $400 of that will be paid out of cash flow in 2010, $400MM more will be paid in 2011 on MBS out of their cash flow
    • Will also use some funds to develop first 2 phases of sites 5 & 6 in combination with the project financing that they raised
    • US Restricted group: EBITDA $439MM, debt $4.3BN, cash $2BN, leverage was 5.4x 
    • Venetian Restricted group leverage was 2.6x  (Macao)
    • Expect the sale of non-core assets in the near term to help them going forward
  • Guidance on hold rates: VIP: 2.7-3% as the normal hold rate for RC play, for Mass play, they think it's more reasonable to use the 4 quarter moving average as normal instead of a one size fits all approach



  • Table game cap in Macau
    • Assured for 400 NEW tables & 2,200 slots on sites 5 & 6 to start with. 
    • They will likely also move some tables and slots that they will have to move from other properties in Macau if they need to as well (170 tables that aren't being utilized or are marginal at other properties)
    • Adding 100 electronic tables too
    • Will be allowed to add 270 additional NEW games in 2013
  • MBS metrics
    • The electronic table games at Genting have been gangbusters.  They ordered games that they should get in 6-8 weeks
    • The slots are winning $400-900/day
    • The electronic roulette games play 10x faster then the live games
  • Why are the FIT rates on the weekends so good?
    • It's not across the board - just in FIT leisure.  Not sure why.  All of April was strong (+YoY)
    • Group demand is strong but pricing doesn't accompany that demand
    • For the last 4-6 weeks, weekends averaging $240-260 ADR
  • Lots 5 & 6 in Macao and the foreign labor issues?
    • Have 3,900 workers on the site now
    • They were assured that they will be able to get the labor they need
    • They will have to absorb the low amounts of unemployed workers as well
  • Biggest surprise in Singapore
    • Surprised by the premium direct play and credit applications - about 50% of play
    • Surprised by how much surveillance activities they had to do, and as a consequence they only opened half of their tables on the VIP side
    • Local crowd mix? 33% Singaporean 67% foreigners (Malaysia, Indonesia, Singapore)
    • Good news is that they had a lot of people during the opening day, but they weren't allowed to advertise until April 27th 
    • Will take a while to get the right mix of business. Looking at Baccarat mix relative to other games.
  • Volumes in Macau have been relatively subdued despite good hold
    • A lot of their emphasis has been building their direct play business
  • CoD - are they being more promotional?
    • They have not heard that CoD is changing their commission rates
    • They are selling more than 2/3 of their rooms on a cash basis and don't think that CoD is anywhere near that
  • Singapore VIP vs. Mass Mix
    • 48% of the revenues in the first 8 days were VIP 
    • In operation:
      • 70 VIP (out of 139)
      • 442 out of 559 Mass
      • 1450 slots out of 1600+ slots
    • Commission and rebate structure? They are paying much less then Genting and so far have not had pressure to move those rates so far
    • Ramp up of high end is going well but it is ramping
    • Gaming table win per unit is very encouraging - higher then what he originally estimated and what he used to come up with his estimate of EBITDA potential.  That's because they have higher quality of person visiting their property vs Genting's low brow visitor
    • If their ramp goes very well - in 12 months, the run rate number will be higher then what they estimated
    • They will increase their slots there to 2,500 (that includes electronic table games)
  • In Vegas: About 50% of drop came from Asian baccarat - held in the low 30's.  Held at 13% on the non-baccarat. They usually hold around 28% anyway on the baccarat play in Vegas.
  • 2.84% is their normal hold on rolling in Macau - claim that they were $5MM unlucky in the quarter for the RC business.  So they were unlucky on the Volume base  (RC 1.25%) and luckier on the Rev Share side. But when you combine RC and the RevShare then they were $5MM favorable.
  • Receivables: $118MM in Vegas (31% reserved) and $190MM in Macau
  • Rebates: 0.75% to 1.0% to players on direct play
  • 40-60% gross margins on the casino business in Singapore
  • Every $10 of ADR can contribute $20MM -$25MM of EBITDA in Las Vegas
  • Trying to say above $200 on ADR for groups in 2011
  • Co-op sales at Four Seasons - getting the final "ok" and as soon as they get that they can start selling. Mister of Public works has now been assigned that responsibility. They were looking for $1/SQFT
  • Can't sell the Singapore mall for 7 years and wouldn't consider selling it until its mature - 2-3 years away
    • Maybe I'm confused but he said that they can't sell it for 7 years??

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 80.43%
  • SHORT SIGNALS 78.34%


With the Retailers out with April sales trends, here is a collection of comments from the restaurant industry on April trends.  In general, it seems that April was either in line or better than 1Q for restaurant stocks.



“We expect our second quarter sales dynamics to be similar to the first quarter for our divisions.  We expect moderate same-store sales growth in China in the second quarter.  For the U.S. in the second half of the year we expect positive sales growth.”


“We haven’t seen a significant change since the first quarter.”




“I would say, without really disclosing or talking about really April or April trends or anything like that, we do see, as Doug said, business spending starting to come back. We do see banquet bookings as we go out looking better than they have, same way with some social bookings. So your thesis around the business spending recovering, I would say we saw that in our quarter and feel pretty comfortable that that’s continuing to happen.”




“Our momentum is continuing into April with comparable sales trending positive across all of our geographies”


“I think that the consumer is starting to feel a little bit better. We see consumer confidence scores getting better over the last couple of months. We see a little more spending in the marketplace and yet the stubborn unemployment being at 9.7% still is a factor, I think, relative to that overall spending and net confidence.”


“For April, what we said in the release was that we expect April to be at least as strong as the quarter on a global basis. So what we’re setting there is a floor, saying that it won’t any lower than 4.2 is what our expectation is.”




[In terms of sales trends] “What we saw in March did continue into April…”




“As we move through the balance of the year in CPG, we expect to see accelerated revenue growth in relation to the second quarter driven by both VIA and the SBC QSR expansion.”




“We should note that our comparable sales trends for the first three weeks of fiscal April continue to be in the plus-4% range, and we’re also continuing to see positive guest traffic comparisons.  However, we have seen some increased choppiness in April due to the Easter and spring break holiday calendar shift as compared to the prior month.”




“As is generally our practice, we do not plan to give any more specifics on second quarter-to-date comparable sales trends on this call. With that said, for the second quarter of 2010, we estimate diluted earnings per share between $0.34 and $0.36 based on an assumed range of comparable sales of between flat and positive 1%.”




“For April to date, our same-store sales are negative 3.7% at company-owned and negative 2.4% at franchised locations.”


“Last, and of greater impact in April, is that we have experienced a decline in our alcohol sales, which we believe is a result of aggressive competition and advertising for our bar business, as competitors, both local and on a national level, are offering significant discounts for both food and alcohol.”




“We’re encouraged by the improved traffic trends and these trends have held up this far in April.”




“April comps are tracking at 10.3% for company and 10.4% for franchise bakery-cafes.”


“The first 27 days of the April fiscal period ran at a two-year comp of 8%. As already mentioned, this implies that two-year comps will accelerate the rest of the second quarter.”




“Thus far in April, both concepts are experiencing roughly a 200 basis point improvement from their first quarter comp results [1Q Bistro SSS were -4.4%, 1Q Pei Wei SSS were +1.6%].”


“The pickup from 1Q is primarily traffic.”




“April traffic in the U.S. continues to be positive while comp sales, albeit negative, have been slightly better than March. We believe continued positive traffic is a leading indicator and will play a critical role in improving our comp sales over time. Although it’s still too early to tell what the rest of the quarter will look like, we remain cautiously on cautiously optimistic.”


“U.S. and Canada comp sales were -2% in March…April traffic in the U.S. continues to be positive while comp sales, albeit negative, have been slightly better than March.”




“And during April, sales growth continues to be in the low single digit range.” [Following +2.4% Q1]




“The second half of April was much better than the first half.”




“One should assume a reverse benefit in the second quarter from Easter shift. “




“Clearly, this rare pace of sales growth [+14.3%] is not something we expect to sustain at this level but we do, nevertheless, still expect solid growth in our domestic business in the second quarter.”




“The Pizza category is healthy, and as a whole during the first quarter was gaining traffic from other QSR categories. This trend has continued into the second quarter.”




“April got better than March. We saw about a point and a half improvement in April over where we were in March.”




“April got better than March. We saw about a point and a half improvement in April over where we were in March.”




Howard Penney

Managing Director



Large May Shower: The SP500's Long Term TAIL

There is only one line of support left. That’s the long term TAIL of support (see chart) down at 1063. If that holds, markets aren’t going away – at least not today. If that line doesn’t hold… well, we’ll let you know what we think after we see that closing price.


It will be interesting to hear what the bulls have to say in the morning.


Keith R. McCullough
Chief Executive Officer


Large May Shower: The SP500's Long Term TAIL - S P




In 2008 and 2009, the company spent significant time rightsizing the cost structure of the business and resetting the business model to improve profitability.  When operated and run properly, COSI participates in a very attractive segment of the restaurant industry - the fast casual segment.  For more than two years, COSI has been an operational disaster and has experienced a significant decline in same-store sales and in its catering business (not surprisingly, PNRA has made this a big initiative). 


Part of the cleaning house process requires fixing the operating model in order to capture incremental sales dollars.  In addition to closing stores, COSI has taken the past 2 years to right-size its economic model.  With that in the REAR VIEW, the focus on incremental customer visits is now the priority.




At the end of 4Q09, COSI had cash and cash equivalents of approximately $4.1 million, and little funded debt.  With the recent sale of 13 restaurants in the Washington D. C. market to Capitol C Restaurants LLC for $8.4 million, announced on April 27, the balance sheet and the operating model were further enhanced.  Capitol C has entered into a development agreement to open six additional COSI restaurants in D.C.  Under the terms of the Asset Purchase and Sale Agreement, $6.4 million of the purchase price was paid in cash at closing, $1.4 million is to be paid pursuant to a three-year note and the balance of $0.6 million is being held in escrow subject to the satisfaction of certain conditions.




The refranchising of the D.C. restaurants is a strong indicator that COSI has turned the operational corner and raised the likelihood that COSI will see accelerating franchised revenue growth over the next 12 months.  COSI opened six franchise locations in 2009 and is looking to accelerate franchise unit growth in 2010.  Specifically, management stated on its 4Q09 earnings call that there has been a lot of interest on the part of potential franchise partners over the past 6-9 months.  To that end, the company said it would begin to make “specific contacts to individuals in various markets” in April and May.  Based on the refranchising of slightly more than half of the company’s D.C. market in late April, those plans are coming to fruition. 


The company’s focus on reducing its cost structure has helped on the food and labor cost lines and these benefits have flowed through to the franchisees.  As margins and returns continue to get incrementally better, franchise growth will follow as the capital markets allow for franchisees to get incremental financing.  With COSI operating 68% of the store base at the end of 2009 (closer to 60% in 2Q10, adjusting for the partially refranchised D.C. market), there are further opportunities to refranchise more stores, thereby raising cash and enhancing the business model.




As of the 4Q09 conference call, management expected to complete the month of March with positive system-wide same-store sales, reflecting positive growth at both company and franchise locations.  For reference, COSI’s 4Q09 call took place on March 29, 2010 so management had good visibility on March results.  Like every other restaurant company, COSI’s trends were “derailed in February” due to the record snow and weather that the company experienced in 100% of its company markets.  It should be noted that the improvement in same-store trends is due largely to increased operational focus as the company recalibrated its marketing calendar for 2010.  COSI shifted its marketing dollars away from the extreme weather months of 1Q and added it to the balance of the fiscal year.  COSI’s 2Q will see the benefit of additional and refocused marketing dollars.  That being said, I would not expect to see a significant pick up in 2-year average trends until the second quarter, though my 1Q10 -1% company same-store sales estimate assumes a moderate sequential improvement in 2-year trends (big improvement on a 1-year basis from 4Q09’s -6.6% as the year ago comp is much easier).  Also helping 1Q10 is the fact that management stated, relative to catering, that it has “started to see some recovery in early 2010 from the economic turbulence of ’09.”  It is important to remember that declining catering sales (-24% in 2009) have put increased pressure on the company’s average check.






Historically, COSI has never done any meaningful marketing outside of an in-store focus on its most loyal customer base.  Management recognized that it must now attempt to broaden the concept’s appeal by extending brand awareness.  The driver of revenue growth over the next year will be (1) increased marketing (2) new day parts and new products (3) focused operations and (4) a new coffee program.    


INCREASED MARKETING - One of the biggest potential drivers of incremental l traffic is increased marketing dollars and a more efficient use of current marketing spending.   With a new advertising agency in place, COSI will increase spending on “out-of-store” media to increase awareness of the brand and drive incremental traffic.  COSI also has a newly designed website, menu boards and a new social media team in place to drive the marketing effort.  The company’s newly revamped website (completed in late 2009) will have the capabilities to roll out online ordering, online catering, and social media promotions in 2010.


CATERING - While catering sales started to recover in 4Q09 (only -13.5% versus -27.5% in the prior two quarters), there is a very large opportunity in catering.  The products and menu are a good fit for catering.  Operationally, COSI has consolidated its catering call center and is now focused on the logistics of improving ordering, packaging, and delivery.  In addition, COSI is going to launch a catering loyalty program in 2010. The company also plans to expand its direct sales efforts, particularly in its urban markets, in order to drive incremental catering sales.  As I stated earlier, management suggested that it experienced sequentially better catering trends in early 2010.


OPERATIONAL FOCUS – At lunch, management is working to simplify its operations in an effort to serve more guests during the high demand lunch hours of the day.  Specifically, management is working toward reducing wait times.  Management commented that its recent initiatives to increase speed have translated into recent sales lifts and an increase in positive responses from its guest feedback tools.


GROWING DAY PARTS AND NEW PRODUCTS- COSI launched 3 new breakfast wraps on March 29 (so more of a 2Q10 sales driver) to help expand the breakfast day part.  The company’s breakfast menu also includes steel-cut oatmeal, breakfast sandwiches; Squagels, unique to COSI and Fruit Parfaits.  In the coming months, COSI is also working to capitalize on its coffee platform and improve its grab-and-go beverage products, which could potentially drive both traffic and margin growth. 




Operating margin declined 170 bps in 2009, excluding asset impairment, store closure and lease termination costs.  The company’s efforts to reset its cost structure, primarily on the cost of goods sold, labor and G&A expense lines, stemmed further declines.  G&A expense, alone, declined nearly 25% in 2009 and 200 bps as a percentage of sales.  With company-owned same-store sales -10.8% in FY09, COSI experienced significant deleveraging during the year on the labor and occupancy expense lines, despite management’s cost cutting initiatives.  To that end, COSI will need to see a return to positive same-store sales growth before we can really see the magnitude of the benefit to the company’s P&L.


As I said earlier, I would expect same-store sales to get better in 1Q10, but the benefit from the increased and redirected marketing spending, combined with the recently launched breakfast wraps, will not materialize until the second quarter.  The YOY operating margin comparison, however, is much easier in the first quarter than in 2Q10, and I would expect COSI to report a nearly 200 bp improvement in margin (though still negative).  It will be important to see how much leverage the company achieves in 1Q10 with significantly better top-line trends (on a 1-year basis).  From there, it will be easier to measure the impact on margins for the remainder of the year based on my assumption for positive same-store sales trends and to gauge what it will take for COSI to return to profitability.  Regardless, I would expect margins to improve in FY10 with the second quarter being the most difficult from a YOY comparison standpoint.


COSI’s FY10 margin will also be helped somewhat by the fact that the company has no plans to open company-owned units, relative to 2 in FY09 and 1 in FY08.  The company has reduced its new unit growth over the last couple of years from 21 in FY06 and 6 in FY07 as it has worked to reset its cost structure and improve in-store unit economics. 


Thoughts on valuation due out shortly…


Howard Penney

Managing Director


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.