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LV Strip revs declined 6% in May, in-line with our projection. Baccarat volume was flat, despite the 26% increase in table supply, bucking the recent positive trends.



Baccarat volume carried the Strip last year, increasing every month except February (Chinese New Year calendar shift) and July (only a slight negative).  The Nevada Gaming Board released May statistics yesterday and Baccarat volume was essentially flat, despite the 26% increase in Baccarat table supply, mostly from the addition of CityCenter.  May represented the third straight month of sequential declines in YoY growth in that important metric.


At this juncture, it’s difficult to discern whether the slowdown is related to difficult Baccarat comps, the deceleration of the Chinese economy, or loss of business to Macau.  However, the trend is disconcerting, considering that slot and table volume excluding Baccarat continues to be sluggish as can be seen in the following chart.




Overall, Strip gaming revenue declined 6% which was right in-line with our projection.  As expected, slot hold percentage normalized versus a very low number last year related to the timing of the hopper count.  Consistent with what we’ve been hearing in the market – and in our projection, Baccarat hold percentage was significantly below normal at 8.3%, causing Baccarat revenues to fall 37%. 


Again, the only real surprise in the month was the aforementioned Baccarat volumes which is a metric we will be closely monitoring.  Given the addition of CityCenter and the sluggish results, the promotional activity in this important segment is ripe for acceleration.  The MGM properties likely will show significant share gains, although a very low hold percentage will prevent the gains from hitting the bottom line.  We believe WYNN and LVS lost Baccarat share in Q2.  Stay tuned.

Ukraine: The Silent Mover

For the last weeks we’ve been staring at the outperformance of the Ukrainian equity index, PFTS, which has held the top spot in year-to-date performance among global indices, and currently stands at +39.5% YTD.


While we expect that Ukraine’s equity market is not front and center on your screen, the country did make headlines yesterday after Fitch Ratings upgraded Ukraine’s sovereign credit grade one step to B from B-. More broadly, Ukraine, much like Hungary and Romania, has jockeyed with the IMF over funding to maintain its “fiscal and financial stability” over the last months. And while its lifeline with the “West” is important for market confidence, it’s clear that Ukraine’s attention is to the East, despite recent efforts by the US to “reset” relations with Moscow and the former Soviet states.  Note that Secretary of State Hilary Clinton visited Ukraine’s President Viktor Yanukovych last week on a five-nation tour that also included Poland, Azerbaijan, Armenia, and Georgia.


Washington may be playing a game of catch-up it can’t win. 


Irrespective of Washington’s goals, the election of Moscow-backed Yanukovych in February of this year has set the political tone for the country, one in which the Kremlin is pulling the strings. In that light, President Yanukovych has abandoned his predecessor’s commitment to join the North Atlantic Treaty Organization (NATO) and secured gas subsides with President Medvedev that should bring an end to gas disputes for him at home. (Remember the critical role Ukraine plays as the main transit supplier of Russian gas to Europe, moving up to 80%, with the remainder channeled via Belarus.)


Perhaps it is the confluence of optimism from an agreement with the IMF on July 3rd  for a new $14.9 Billion loan tranche; the hope of the country's upcoming road show for its first Eurobond sales since 2007 (to raise $1.3 Billion); and a more secure geopolitical environment with its near unilateral ties to Moscow, which could continue to drive Ukraine’s equity market and local currency, the Hryvnia, higher.  The charts below give context to the equity and currency moves over the last three years, while CDS prices indicate a waning in the risk premium YTD.


After the economy slid 15.1% last year, Fitch expects the economy to expand 4.5% this year, driven by stronger external demand. We don’t have an investment position in Ukraine, but monitor the country due to its geopolitical impact.  


Matthew Hedrick



Ukraine: The Silent Mover - ukr1


Ukraine: The Silent Mover - ukr3


R3: UK Comp/Austerity Duration Mismatch


July 7, 2010


There is a lot of head-scratching out there on the part of investors and managements alike about why austerity in the UK is not hitting consumers yet. We think that there is a meaningful duration mismatch brewing.





Marks & Spencer Group put up decent enough sales numbers (+4.4%) in its first quarter, but a tepid outlook wasn’t what the market had in mind. Sales were up 4.4% in the first quarter ended July 3, however, the retailer is cautious about the remainder of the 2010-11 fiscal year. Clothing (+7.4%) and General Merchandise (+7%) drove the sales gains. Per the company, customers responded well to improved styling, stronger fashions and great value.  I call that a fluff statement – but hey, numbers don’t lie. M&S’s discretionary business definitely remains healthy.  


This is most interesting because we’re hearing from Ralph Lauren, Nike, Calvin Klein/Tommy Hilfiger (WRC/PVH), Next, Burberry and others that sales in Europe remain healthy – at least in constant currency.


That dovetails interestingly with a question I’ve been hit with more than a few times over the past week. The crux of it is “when will austerity measure really begin to negatively impact consumer spending in the UK.”


Investors in the US have that attitude where they are shrugging their shoulders and saying ‘wow, I started to brace for a slowdown 2-3 months ago in UK, and have not yet seen it. Maybe I was wrong in my conservatism. Ironically, CFOs are saying the same thing. Now the companies are starting to think that they are bullet-proof, and are therefore conveying that cockiness to shareholders. Ultimately, investors are getting complacent with complacent management teams.


That, of course, is when the volatility – and the fun – begins. When does this come to light? I’m not sure. Will it be at the Goldman conference in September? Or when the companies give their 2011 plans w 4Q10 results in Jan?  Too much longer and the currency hedges will unveil holes in the model. Take your pick. Either way, complacency is gonna hurt those components of the global retail supply chain that don’t have a Macro process and have not been planning for this for 2-years.


Maybe the simplest way to put it is how Keith highlighted recently “Austerity hasn’t actually been implemented yet. When it does, there will be a lag as to when it ultimately touches the consumer. But old spending habits will die hard when they do… and duration mismatch between the actual austerity and it hitting people where it matters will become increasingly obvious.




  • We continue to keep an eye on Amazon’s apparel and footwear efforts as the site continues to grow the business in a post Zappos world.  This time the company is offering a set number of fall footwear SKU’s for pre-sale, with delivery beginning in mid August.  While this is something we don’t often see from a physical shoe store, we can’t ignore the positive benefits to Amazon’s cash flow and inventory management from gauging demand  for fashion styles in advance.
  • According to a Harris Interactive poll, 7 in 10 Adults see the economy staying the same or getting worse over the next twelve months.  The survey also highlights a more dire look in the next six months, in which only 21% of American’s believe their financial condition will improve over the next 6 months (down from 25% in May).
  • In an effort to begin monetizing Twitter, the company launched @earlybird, a Tweet that announces limited time deals, special events, and exclusive offers.  Similar to Gilt or RueLaLa, the Tweet stream aims to feed consumers find limited but compelling deals offered by retail partners.  Twitter will take a percentage of each sale generated by the service. 



Hot Temperature Drove East Coast to Shopping - Consumers throughout the Eastern U.S. sought relief from record-breaking temperatures Tuesday any way they could — including going shopping. As the thermometer topped 100 degrees in Manhattan and elsewhere, retail executives said traffic to their air-conditioned stores and malls was heavier than normal. The searing heat followed the warmest July 4th weekend since 2007 and the third-warmest June in 50 years. And the heat wave was forecast to continue through at least Friday, when temperatures are expected to dip to the more-normal mid-80s. Over the weekend, businesses in the eastern two-thirds of the U.S. experienced double-digit increases of seasonal purchases compared to the coldest 2009 period in a decade, according to Planalytics. West Coast consumers are still waiting for summer to start and holding off on seasonal purchases. <wwd.com/retail-news>

enhanced search functionality and increased customer service. <sportsonesource.com>

Hedgeye Retail’s Take: Let’s get the heat out of the way. It’s good for biz now, but cool weather in Aug will set back-to-school off on the right foot.


R3: UK Comp/Austerity Duration Mismatch - Weather 7 10 


Mobile Commerce to Jump from 160 Retailers to 770 - Today there are 160 retailers active in mobile commerce, according to Internet Retailer research. By month’s end, if all goes as planned, there will be 770. E-commerce platform and online marketing provider Shopatron Inc. is in the final weeks of testing m-commerce site-building functionality that it will add to its platform offering at no additional cost to its more than 800 clients. <internetretailer.com>

Hedgeye Retail’s Take: Kind of surprising that we still refer to this as ‘e-commerce.’ It’s getting to a point where it is just ‘commerce.’ Anyone that’s just catching on now is way behind the curve.


China's Shandong Ruyi to Complete Acquisition With Japanese Fabric Maker Renown - Shandong Ruyi Group, one of the largest Chinese textile manufacturers, has expected to complete its purchase of 41.18% stake in Japanese Renown Inc, a 108-year-old fabric maker, by the end of the month.  <fashionnetasia.com>

Hedgeye Retail’s Take: A culturally odd deal that we see so few of. Nonetheless, it makes sense – especially with import/export duties eliminated intra-Asia as of 1/1/10.


BEBE To Shutter PH8 Concept - Bebe Stores Inc. said Tuesday it will end its failed PH8 experiment and either close the format’s 48 stores or convert them to the more promising 2b bebe concept. Closures and conversions are expected to begin shortly, with all stores either closed or converted by the end of Bebe’s 2011 fiscal year next July. Bebe said comparable-store sales for the fourth quarter would come in at the low end of earlier guidance of a midsingle-digit decrease to a midsingle-digit increase.  <wwd.com/business-news>

Hedgeye Retail’s Take: It’s about time…


Pier 1 Plans to Slowly Re-enter E-commerce - Pier 1 is hatching plans to make all of its inventory available for purchase online by September, but for in store pick up and payment only. After a three year absence, Pier 1 Imports Inc. is making a very limited return to online retailing. The multichannel retailer of various home furnishings is hatching plans to make all of its inventory available online by September. But purchases will be limited to making a reservation online, but paying for the merchandise and picking up the items must be done in a Pier 1 store, the retailer says enhanced search functionality and increased customer service. <internetretailer.com>

Hedgeye Retail’s Take: Very late to the party, but with 5 consecutive quarters of improved sales growth vs. inventories, PIR needs another trick. Maybe this is a temporary fix.


Indian Apparel Manufacturers Seek Business in Vietnam - Indian garment companies are seeking new business opportunities by planning to offer high-quality material as well as technology assistance to Vietnamese companies. <fashionnetasia.com>

Hedgeye Retail’s Take: This is still a function of a focus on higher consumption intra-Asia vs. relying so heavily on the West. Not good long-term for us.


ANF Still Investigating Bedbug Problem in Manhattan - Abercrombie & Fitch Co. is still investigating its bedbug problem in Manhattan, but hoping to reopen the Abercrombie & Fitch unit in the South Street Seaport on Thursday. The company’s Hollister flagship on Broadway and Houston Street in SoHo reopened Saturday after the infestation was exterminated, and on Tuesday saw good traffic despite the scorching heat (and being temporarily tainted), with Broadway busy midday. <wwd.com/retail-news>

Hedgeye Retail’s Take: Tough to manage risk around something like this. More of a PR mess than anything else, but it definitely will have a lingering effect on that store.



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The Macau Metro Monitor, July 7th, 2010


Paper maker Long Success, which also operates a VIP room in the Venetian Macao, is considering selling its gaming business, CEO Hu Dongguang said this week.  The group wants to focus less on gaming and more on environmental protection.

Although Long Success moved the Jun Ying VIP Club from Grand Waldo to the Venetian Macao in May 2009, the number of visitors stood below the group’s expectations during the year.  “Obviously, the keen competition arising from continuous openings of new casinos in Macau has made the operating environment more difficult,” the company wrote in its annual report.



Taiwanese Premier Wu Den-yih said, "Individual Chinese tourists may be allowed to come early next year if preparatory measures have been completed by the two sides."  So far, Chinese can only travel in groups to Taiwan. 


Up to 500 individual tourists will be permitted to travel to the island each day after the ban is lifted, probably in early 2011, said Wu who was quoted by the Economic Daily News.



Data from Uwin Real Estate Information Corp showed a total of 3.57 million square meters was sold in Shanghai's primary market, compared with 5.41 million sq meters a year earlier.  The average price of new flats fell 14.2% YoY in June.  Despite the property market cooling down, a number of mainland newspapers speculated yesterday that the government could release new cooling measures in the coming months.


While there is precedent for a lower multiple, we think the Street is too low on margins. The next year should validate the Board’s decision to replace Dan Lee.



Why is PNK getting demolished?  Potential exposure to the Gulf oil spill, an economic wall of worry, high leverage, Baton Rouge concerns, a lousy May in the regional markets;  the list goes on and on.  The stock is down almost 40% in two months with no real announcements from the company.  That brings the valuation multiple down to 6x our 2011 EV/EBITDA.  One could take it a few steps further and point out that multiple includes $50 million in capex related to the construction of Baton Rouge (almost $1 per share) and doesn’t include non-EBITDA producing assets such as BR, Reno, and AC land that we value at $200 million or over $3 per share of equity value.


So the stock is cheap.  Blah, blah, blah.  After the market nose dive, a lot of stocks are cheap.  Besides, we’ve seen these regionals trade into the 5xs.  There has to be catalysts to buy a cheap stock these days.  We think better margins will be the main catalyst this year and next, although a completely revamped marketing program could boost top line as well.


Earlier this year, the PNK Board replaced the developer/empire builder Dan Lee with the operator Anthony Sanfilippo as CEO.  Mr. Sanfilippo, who has been buying stock recently, cut his teeth in the Harrah’s organization so he knows a little about database marketing.  He also seems to know a little about cost cutting.  We detailed the cost cutting plan first back in April in our Q4 earnings preview note so we don’t want to rehash the components here.  We did see evidence of the plan in Q1 where PNK surprised on the upside due to margins.


In looking at the following charts the potential for margin improvement is obvious.  We’ve compared PNK to the other pure regional gaming operators in terms of overall EBITDA margin and a more apples to apples comparison of EBITDA margin less gaming taxes.  PNK under Dan Lee clearly trailed the industry in this very important metric.  The other companies began to cut costs in 2008 when the industry turned, so their margin comparisons are much more difficult than PNK.  ISLE probably has more room to cut, although there are structural issues with some of their properties.  We believe PNK will still be comping against a higher cost structure through 2011.




As we mentioned, cost cutting shouldn’t be the only area of significant improvement.  Marketing is Mr. Sanfilippo’s specialty.  The chart below shows that PNK has trailed the industry on the operating side as well.  It compares PNK’s revenue per position in each of its major markets to the competition.  With the exception of PNK’s L’Auberge, PNK trails the market badly in win per position per day, presenting significant room for improvement for a good operating team.  L’Auberge, of course, is a much newer and better product than the weak Lake Charles competition.




We understand the market’s concern surrounding consumer spending in general and very discretionary gaming spend in particular.  Meaningful leverage only adds to the risk.  At least PNK has a few major levers left to pull vis-à-vis the rest of the industry.  Of course, if the economy double dips, no casino operator will emerge unscathed.


This morning's data makes it 8 of the last nine weeks that the MBA Mortgage Purchase Applications index fell sequentially. The index dropped another 2% this morning falling to its lowest level since 1996 in spite of record low mortgage rates. The Purchase Applications Index is a good proxy for overall demand as it captures at least 50% of all mortgage purchase application volume.


Home prices are a simple function of supply and demand, but housing assets are sticky assets and reprice with a lag. We've found the lag to be one year. As such, record low demand today will manifest in materially lower home prices a year from now. We are now two months removed from the stimulus expiration and are still hitting new lows in demand. We'll keep a close eye on the remaining summer months to see whether demand rebounds as we get further removed from the stimulus expiration.




As a reminder, housing demand is positively correlated with affordability, meaning that demand wanes as prices go down. Similar to retail investors chasing performance, the math suggests that as home prices increase either as a result of high mortgage rates or appreciation of home values, more buyers come to the table. This is in stark contrast to the consensus belief that high affordability will stimulate housing demand and help clear burgeoning inventory.




Joshua Steiner, CFA


Allison Kaptur




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