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Despite a much higher Mass mix, Venetian’s margins are comparable to Wynn. High promotional activity is the culprit.



Wynn reported massive margins in Macau a few weeks ago which we discussed in our April 30th note, “WYNN GROWS INTO ITS MULTIPLE”.  A lot of the margin looks sustainable assuming Wynn continues to grow its direct VIP play and keeps its commissions low.  Unfortunately, we cannot say the same for the LVS Macau casinos.


Bottom line, Sands China is paying total commissions much higher than the “official” cap of 1.25% of rolling chip or 44% of win.  A fat commission structure explains why Venetian’s margins are in-line with Wynn Macau's despite Venetian generating a higher mix of higher margin Mass business and a greater percentage of VIP play than Wynn.  See the chart below for illustration.




Sands China paid out aggregate commission dollars of 1.37% of RC in 1Q2010, 1.27% in 2009, and 1.31% in 2008 or 47%, 45% and 46%, respectively, if we look at commission as a % of win.  We define aggregate commission dollars as the sum of:

  • Rebates offered to direct players and the estimated monies paid to junkets that ultimately get paid back to junket customers as rebates.  This number can be calculated as the difference between calculated gross gaming revenues and reported net casino revenues. Rebates are recorded as a contra-revenue item.
    • For Sands, this amount is usually between 75bps to 100bps of VIP Turnover or 28-35% of VIP hold %.
  • Junket commission expenses are the part of the junket commission that the junket keeps in return for his service of providing credit, working capital, collection services and client promotion activity.  Junket commission expenses are reported in casino operating expenses by Sands China and broken out in the notes section of their releases.
    •  Junket commissions are estimated between 24-30bps for Sands China.
  • In addition to offering players rebates and paying junkets commissions for their services, operators also offer “comps” to their junkets and VIP players in the form of free rooms, free meals, free transportation (including those wonderful jet rides), and other forms of “entertainment.”  When we met with DJIC last year before commission caps were put in place, they told us that the caps were meant to capture the value of “comps” in the all-in rate.  Of course, they also intended to put a cap on revenue share deals, but that also never happened.  Regardless, complementary services have a cost to them and should be included in thinking about the cost of the VIP business.  Like rebates, complimentary non-gaming services are treated as a contra-revenue item.  When Sands China reports, non-gaming revenues are reported as net of “comped” revenues vs. when LVS reports the comps are in the promotional line.  To be fair, we reduce the promotional line by 50% in order to capture the true cost of the promotional instead of just the revenue forgone.
    • Gross comps are not insignificant;  they’ve been running between 19-30bps.

Even excluding the complimentary non-gaming services, commissions are higher than one would expect given the high percent of direct play across the 3 properties and the significant weight towards RC junkets vs. revenue share arrangements. Part of the explanation for higher all in commissions is that Sands pays a higher rebate rate to its direct players – perhaps closer to 1% not including comps.

  • 80% of Venetian’s VIP commissions are paid on a RC basis (i.e. 1.25%).  Venetian’s direct play as a % of total VIP Turnover was 21% in 1Q2010, 17% in 2009 and 15% in 2008.
  • 50% of Sands’s VIP commissions are paid on a RC basis.  Sands’s direct play as a % of total VIP Turnover was 10% in 1Q2010, 11% in 2009 and 2008.
  • 80% of Plaza’s VIP commissions are paid on a RC basis.  Plaza’s direct play as a % of total VIP Turnover was 43% in 1Q2010, 28% in 4Q2009 and 49% in 3Q2009.

Brazilian Breakdown Continues

Brazil’s Bovespa is having another terrible day today, losing another -1.9%, trading down to 62,232 and adding to the concerns that are permeating bearish global equity market conditions.


As you can see in the chart below, Brazil remains broken from both an immediate term TRADE and intermediate term TREND perspective. Underneath the chart we have compiled Moshe Silver’s primarily translated local Press Notes from Brazil as of the last 48 hours. Local consensus is as local consensus does.




Brazilian Breakdown Continues - Bovespa


Brazil Press Notes – Sunday 16 May 2010

O Globo headline: “Lula will leave his successor a gross national debt of 64% of GDP, the largest in the last ten years.”

O Globo reports total public sector debt may rise to 64.4% of Brazil’s GDP by the end of 2010, the highest level in ten years.  The paper reports this is primarily attributable to a special loan program implemented since last year between Brazil’s treasury and the BNDES – the Brazilian Development Bank, and funded by bonds issued by the Brazilian treasury.  It is projected that Brazil’s public sector debt could reach R$2.2 trillion in December, or 64.4% of GDP.

Growth of public sector debt is in sharp contrast to Brazil’s external debt, reported at barely 3.4% of GDP.  This disparity has economists troubled, particularly in light of the current wave of credit miseries afflicting European nations.  There is concern that Brazil’s hard-won fiscal credibility is now at risk.


The 2009 global fiscal crisis opened the way for a radical change of approach by the Lula administration.  The accumulation of surpluses, which had reduced debt as a percentage of GDP, was replaced by a combination of increased expenditures, and an expansion of credit by increasing public indebtedness.


Commentary: Lula may be Brazil’s Jack Welch.  Having overseen impressive economic growth, and having fostered social programs that have improved the lives of millions of his countrymen, Lula may leave behind a nasty twin surprise as he steps down. 


First, the economy may turn out to be an absolute shambles.  This is not completely his fault, as he can not be blamed for the US and European financial crises.  (As the US economy was infecting its neighbors with the fiscal equivalent of AIDS, Lula observed in a global forum that the black and yellow and brown people of the world were now all going to suffer tremendous harm at the hands of white bankers.  “I don’t see any one among them with dark skin,” he said.  “They are all white.”)


The second nasty surprise may be just how intractable the nation’s drug and gang violence is.  While Lula insists that the violence is largely contained to well-known sections of the major cities – and that people will be all right if they stay in the right part of town – his administration doesn’t seem to have made a dent in the staggering level of violence.  The nation also reports 23,000 drug-related homicides a year, and foreign tourists have a nasty habit of turning up dead in the middle of downtown Rio and Sao Paulo.  It doesn’t take many reports of random violence to scare people away.  The nation has already fallen behind on its “ironclad” schedule to prepare stadiums for the World Cup.  The FIFA President made an offhand remark the other day about other countries being able to host the games on short notice – it was not taken as a threat, but things can change.  Two years out, Brazilians may regret not having replaced Lula after his first term.


Government Must Cut Spending

The government will have to cut public sector spending far more than the R$10 bn announced last week if they are to restrain growth in the economy.  Economists are now saying that the accelerated level of economic activity, and its attendant inflationary pressure, can only be contained by severely restraining public spending.  In order to cool off demand and bring down the price level, the government must withdraw liquidity from the economy, say economists.  In order for this program to be effective, economists say the additional budget cut must be at least R$30 bn.  The government has already implemented a budget reduction of R$21.8 bn this year, but this measure was accompanied by a reduction in receipts already foreseen for the period, which means the drop in revenues is preventing the budget cuts from having an effect.  The government just announced a further R$10 bn in possible cuts, but the budget is already set, and it is difficult to see where these cuts will be taken.


Last year, public expenditures were R$571 bn, of which barely R$19 bn were subject to cuts as being nonessential items.

The government is supposed to identify where further cuts will be taken.  The announcement is supposed to come by the end of this month.


The ex-director of the Central Bank observed that the European crisis will force the government to move more slowly in issuing bonds, which means the rate of deceleration in the economy will be less, complicating the situation into the year 2011.  Growth is projected at 7.5% this year, and the economy will likely be overheating going into 2011, with minimum projected growth of 5%, which will require still higher interest rates, requiring additional budget surpluses to service the debt.


Month of May Inflation Surprise 

General price levels rose more than expected for the month of May, due to a strong increase in wholesale prices.  The General Price Indicator (IGP-10) rose 1.11% in May, after a 0.63% rise in April, according to the Getulio Vargas Foundation.  A Reuters poll of economists had foreseen an increase of 0.78%, an average estimate based on a range of 0.7%-1.04%.  The reported figure is above the top end of the range of estimates.

The wholesale price index rose 1.34% in May, after advancing 0.51% in April.  The consumer price index rose 0.64% in May, versus an earlier increase of 0.80%, due to a cooling off in food price increases.  Food prices were up 1.12% in May, versus 2.58% in April.  The national index of construction costs, which was up 1.01% in April, rose 0.77% in May.


Brazil Press Notes – Monday 17 May 2010

Headline from O Globo: “Chinese Competition Reducing Brazil’s Africa Exports”.  The guiding principle of the Lula government’s foreign policy – South-South integration – risks a severe setback due to the interruption of trade and logistical cooperation between Brazil and African nations, particularly in the area of transportation.  The situation is seen as being exacerbated by an aggressive Chinese presence in the region, as Chinese purchase large tracts of land, and engage low-priced manual labor by offering competitive wages, depriving established Brazilian companies of contract laborers.

An alarm was sounded a few days ago when the April trade figures were released.  Brazil’s exports to Africa fell 32% versus April 2009, the only market to record a reduction.  In the first four months of 2010, trade declined 14.8%.  Brazil sold fewer automotive parts, machinery and equipment, cereals, iron ore and airplanes to African customers.

Welber Barral, Brazil’s Secretary of Foreign Trade, says Brazilian companies are losing important contracts in infrastructure projects to the Chinese.  “The data are somber,” he said.  “In 2009, China’s sales to Africa were US$50 Bn , corresponding to a third of Brazil’s total exports.  The Chinese have a very aggressive financing mechanism,” said Barral.


Keith R. McCullough
Chief Executive Officer


Moshe Silver

Chief Compliance Officer


Table gaming revenues tracked through May 16th were a whopping HK$8.6bn. Wynn, MPEL, and SJM gained share at the expense of LVS and MGM.



We just received some preliminary Macau numbers for the first half of May.  Fueled in part by Wynn Encore, table revenues through May 16th were HK$8.6 billion.  The Golden Week celebration took place in early May and needs to be taken into account in predicting the full month revenues.  Adding expected slot revenue of approximately $700 million for May, we think May could end up generating approximately HK$16 billion in revenues, up 85% year over year.  Here are the market shares MTD:


SJM            35.3%
LVS            15.1%
Wynn          18.1%
MPEL          13.2%
Galaxy         11.9%
MGM             6.4%


We already wrote about Wynn’s impressive May so far in our note last week.  Other notable market share shifts concern LVS, MPEL, and MGM.  LVS has been losing share but it took a huge dip thus far in May and if it holds, will be the lowest on record for the company since Venetian opened.  We don’t know how the company held but we’re guessing it was pretty low.  For the last few months, LVS’s share has been in the 19-21% range.  On the other hand, MPEL’s share improved 60bps sequentially, despite the Encore opening.  MPEL could be the big winner this month relative to estimates.  Finally, MGM’s share fell again sequentially to a level not seen since February of 2009.  Not the kind of numbers to be posting into an IPO.



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Braveheart: SP500 Risk Management Levels, Refreshed

There was a time in my career where I thought I could pretend I was Braveheart and buy my “best ideas” on valuation – then I got crushed. In a market that’s flashing negative across my core 3-factor model (Price, Volume, Volatility), the risk/reward is skewing to the downside.


After registering price, volume and, volatility studies after the first hour of this morning’s trading, the risk in the SP500 clearly outruns the reward (1108 downside versus 1144 upside). Here are some other real-time risk management factors to consider: 

  1. SP500’s dominant TREND line (1144) is not only broken, but the bulls are keep trying to test it – that should equate to higher VIX if SPX fails again
  2. VIX remains in a Bullish Formation (bullish across all 3 of our core investment durations, TRADE, TREND and TAIL), with no resistance to 39.37
  3. Immediate term TRADE support drops to a lower-low for the first time in a week (was 1110 and is now 1108 which would also be a lower-closing low) 

The brave move from here may simply be not getting sucked into the bid.



Keith R. McCullough
Chief Executive Officer


Braveheart: SP500 Risk Management Levels, Refreshed - S P

LOW/HD: Same Biz, Polar Approaches

LOW/HD: Same Biz, Polar Approaches


A quick roll in sales/inventories alongside a margin hit at a time when LOW faces one of its easies compares shows some interesting divergences between LOW/HD. But the real question is whether you want to be here at all. From this point – the call on housing matters.


We’re seeing such a polar opposite result from LOW vs. HD as it relates to trading off between the P&L and the balance sheet. The chart below says it all. It overlays the trajectory for LOW/HD on those metrics for each of the past 4 reported quarters.  The Y-Axis measures the sales/inventory spread (higher is better), while the X Axis measures the yy change in margin. HD has had positive margins, with an improving sales/inventory spread, while LOW’s margins AND inventory spread have both been down in 4 of the past 5 quarters. More troubling for LOW is that its trajectory on this chart just swung back down to the lower left quadrant – even though it faced the easiest compare of the year.


While it’s tempting to look at the puts and takes on each of these two in more detail, the bigger question should really be whether you want exposure to either. We have four quarters of improvement on the margin from both – off of a cyclical low. Now, you need to believe in a housing recovery to be comfortable in these names. If you want to make that call, then be my guest. You might be lonely for a while.


LOW/HD: Same Biz, Polar Approaches - LOW   HD






R3: Tricky Dick’s Gonna Beat


May 17, 2010





Here are some of our thoughts on Dick’s headed into the print on Tuesday. The bottom line is that the company should print something starting with at 2, vs. the Street at 13 cents. The comp and GM% setup looks solid. SG&A is up in the air due to catch up spending on systems, but they guided there already. We’re 10% ahead of consensus for the year. The cycle is still shaping up very nicely for this space – which has been core to our NKE and FL calls. But if Tricky Dick sandbags, lowers 2Q, and causes a selloff on the print, you’ll hear me get much louder on this name.


1)      As it relates to EPS – Our model is coming in hot for the quarter. $0.20 vs. Street at $0.13/$0.14 and guidance of $0.13. The key driver is comps. I simply can’t get to anything as low as the 3% comp they guided to. Sales have been strong in the channel based on reports out of competitors, and anecdotes from suppliers.  Weather was less favorable in DKS territory than in other parts of the country – but nothing so debilitating that it should hurt numbers. In addition, they are going up against -3-5% traffic trends in both 1Q08/09, and a 3-4% decline in both traffic AND ticket in 1Q09. To boot, this is the quarter where dot.com starts to get booked in SSS. We should be seeing acceleration in the 2-3 yr trends. In order to get there, I’ve got to double the company’s guidance (and Street estimates). I’m at 7%.


2)      GM%: +100bp sounds about right. Sales/Inventory spread ended last quarter in relatively good position on our SIGMA chart – suggesting that inventories were not a problem. Plus, they should lap Chicks liquidation and golf galaxy clearance last year. If anything, I may be light with 100bp GM improvement.


3)      SG&A: This is the biggest question mark. They deferred investments last year in systems to optimize regional product assortment (i.e. more like how HIBB does it). They noted that it should cost $0.16 ps throughout this year – or an even $0.04 per quarter.  Maybe they sandbagged there, but the reality is that I have no reason to doubt this number. If I back into P&L impact, $0.04 = $4.8mm after-tax (120mm shares), $8.0mm pre-tax, or 3-4% growth to each quarter in SG&A – all else equal. I think I’ve got that plugged into my model appropriately.


For the year, I’m at $1.55 vs Street at $1.37. Next year is $1.70.

Sell-side sentiment is about 50/50 split between bulls/bears.

Buy side is slightly more bearish. Short interest has come down from 16%, but still stands at just over 10%.


No way would I be short this thing headed into the print – even if it is expensive and has tripled off the low. There’s going to be many reasons as it relates to the industry cycle why this thing will make sense as one of the best houses on a bad street. In addition, earnings revisions will be supportive.  There’s still other places I’d rather be in the space as it relates to riding the upside – most notably FL and NKE, but if Tricky Dick beats the quarter yet sandbags guidance and the stock sells off, this one will make it towards the top of my queue pretty quickly.





- Unlike most retailers which are seeing their online businesses grow at rates far greater than their core same store sales, JC Penney.com continues to underperform. The .com business grew 1% in the first quarter, essentially in line with overall sales growth. The e-commerce business continues to be negatively impacted by weak home furnishings sales. While the company is seeing a slight pick-up in soft home, management notes there is still much work to be done here to impact a measurable pick up in this key category.


- Keep an eye of Gap’s efforts to expand and grow its “1969” denim sub-brand and freestanding shops. With a handful of stores already open in LA, NYC, and now Chicago, the company has tapped a former 7 For All Mankind executive to become the creative director of the company’s heritage denim line.


- While most are fixated on Skechers wild success with its ShapeUps toning shoes, the company continues to grow in other ways. SKX announced a recent licensing deal to launch a line of leather goods, including belts, wallets, and coin purses for adults and children. Also on the way are licenses for apparel, sunglasses, legwear, bags, backpacks, and medical scrubs. It’s not clear how the medical scrubs fit into the company’s merchandise mix, but we suspect it has something to do with those in the medical profession already wearing the company’s footwear.





R3: Tricky Dick’s Gonna Beat - Calendar





H&M April Sales fall 6% - Hennes & Mauritz AB  said same-store sales in April slipped 6 percent as the Swedish fast-fashion giant came up against tough comps, cool spring weather and an early Easter holiday. Including new stores, sales for the month grew 4%. As of April 30, the Swedish fast-fashion giant operated 2,037 stores. The April figures represent a slowdown from March, when like-for-like sales grew 9 percent. <wwd.com/business-news>


R3: Tricky Dick’s Gonna Beat - H M 1yr 


Affordable Footwear Act is Back - The footwear bill, which would eliminate duties on certain types of lower-priced and children’s footwear, is being attached to the jobs bill. They asserted that some international manufacturers are circumventing the U.S. tariff system and paying lower duties on some types of imported footwear than their American counterparts by using textiles in the soles of shoes to get a textile tariff classification, which is subject to lower duties. A provision in the Affordable Footwear Act would close the loophole that “allows importers to evade duties that help the domestic manufacturers compete in the U.S. and global markets,” they said. The bill states that textile materials inserted into soles does not change the character or classification of the soles or the shoes, and thus, is subject to the higher duties. The centerpiece of the duty-dropping footwear bill, which the industry has been pushing for a few years, would eliminate some $800 million in tariffs on approximately$1.7 billion collected each year. It would also eliminate tariffs on about 60% of shoes imported into the U.S., or nearly 1.5 mm pairs annually, according to industry figures. <wwd.com/footwear-news>


Chinese Labor Shortage - A year ago, footwear manufacturers, deep in the trenches of the recession, were desperate for consumers to buy shoes. Now, the challenge has shifted to finding someone to make them. Footwear factories have so many orders that they are overwhelmed. Footwear Distributors and Retailers of America claimed after a recent poll that 88% felt the industry had a significant labor shortage, with 86% reporting that the problem had caused deliveries to arrive from one to four weeks late. There is also a generational change with young people having higher expectations of career paths. Footwear companies are feeling it the worst of any segment. <wwd.com/footwear-news>


TRLG Hires Apparel President - Michael Egeck, the former president of The North Face brand, was named president of True Religion Apparel, the designer jeans company.  <sportsonesource.com>


Bulgari Not For Sale - Bulgari SpA, the world’s third- largest jeweler, isn’t for sale, and doesn’t plan to make acquisitions, Chief Executive Officer Francesco Trapani told Corriere della Sera in an interview. The family is “completely resistant” to the possibility of a sale, Trapani said in the interview with the weekly business supplement of the Italian newspaper. Trapani is the nephew of Chairman Paolo Bulgari, grandson of the company’s founder. The Bulgari brothers, Paolo and Nicola, along with Trapani, own about 51% of the company. <bloomberg.com/news>


Senators Approve a Measure that Could Cut Retailers` Debit Card Fees - The fees that merchants pay to accept debit cards, including for online retail transactions, could decline under a measure the U.S. Senate passed yesterday. <internetretailer.com>


Gilt Groupe Goes From Fashion to Furniture - Members-only luxury sale site Gilt Groupe is expanding into home goods, the retailer announced yesterday. Gilt Home will offer 15 sales per week from more than 200 brands that sell products such as outdoor furniture, rugs and bedding. <internetretailer.com>


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