- Yesterday I showed that June’s YoY decline in slot volume of 6.1% actually fell sequentially from May’s 5.8%. The deteriorating fundamentals can also be seen in both the key visitation and hotel stats shown in the following charts. Strip RevPAR declined 18% in June, down from an 8% decrease in May, driven by both rate and, surprisingly, occupancy. Turning to visitation, both air and drive-in traffic declined at an accelerating rate. People are flying less, people are driving less. I don’t know how anyone can look at these stats and argue that business levels improved sequentially during the quarter.
- We won’t see July’s numbers for another month but my intelligence says there won’t be improvement. From here on out, we’re relying on the flop to determine Vegas’s hand. MGM management predicted a fundamental acceleration in Q4 and called Q2 the trough. However, in this business with short booking windows, not even the dealers know until the cards are turned over.
Yeah, I know the stock has already been hit, and management already took down guidance for the year. In addition, this is a management team that gets compensated to hit pre-tax income growth targets. With such short-term incentives and a rather complex tax structure given its domicile, my sense is that the company (like most) can print whatever it wants on the 3Q report tomorrow.
- But on any good news whatsoever, that’s when I’m in there pounding on such a high-conviction idea like this.
- I guess the consensus and its 140bp margin improvement and 30% EPS growth for FY09 does not agree with me.
- I won’t rehash all of my more detailed comment on 6/2 (The Stock Has Popped But The Model Has Not), but consider the following when evaluating whether the company can prevent a massive slowdown in growth next year.
- a) GIL’s top line slows to a (still respectable) mid-teens growth rate as capacity is near fully ramped (vs 25-30% over past 2 years).
b) GIL is at the end of its multi-year offshoring shift that boosted margins by 7 points over 6 years. At the same time, sourcing cotton costs are headed meaningfully higher, and labor rates in Honduras (primary production hub) has just broken into double digit growth range.
c) The industry’s sourcing tailwind becomes a headwind and competitive pressures therefore intensify due to irrational behavior.
d) One of its top competitors, Hanesbrands, is now public and has its own arsenal of cost cuts to pass through to customers as it rightsizes its own business.
e) GIL is shifting its growth to customized programs to US mass retailers, and becomes a price taker instead of a price-maker (as it is in its current screen printing business).
f) With a 12% SG&A ratio, GIL hardly has the sales and marketing structure to profitably grow with mass customers.
- I’m pretty bearish on the fallout from a structural change in the margin structure in this industry. That’s where picking the winners vs. losers gets fun.
- Is Gildan going away? Probably not, but growth is slowing, gross margins are headed lower, and the SG&A rate is headed up. Not only is a 140bp margin boost unattainable, but I don’t see how the current rate is in any way sustainable.
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This morning's Chinese import data (July imports down -7% year over year) is just that, July data – today is August the 12th. Since asset prices are discounting mechanisms of future news, we're going to chalk this July number up as one of the many reasons why crude oil has dropped -23% in less than a month.
I do not have a position in crude oil currently, but I finally see as much short term upside as I do downside (I have not said that in our morning meetings since June) . Call it $6-8/barrel either way. If the US Dollar Index stops going up, I may very well be on the long side of this "Trade".
- If Oil can hold $104.48, the next pain trade is UP.
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Along with other gaming stocks, WYNN has had quite a run over the past few weeks. Sagging fundamentals and escalating budgets are hitting industry ROI from both sides. Mixing lower returns and a higher cost of capital is not a recipe for continued stock price outperformance.
What people are missing in Asia right now is that the economic backdrop is very similar to that which Nixon had to deal with here in the US in the 1970's - wage and price spirals in tandem.
On its own, stagflation is plain bad. Combined with the kind of geopolitical risk that Pakistan carries, any investment in this country is plain scary.
- The Karachi 100 Index Looks horrible
At +7.1% year over year reported for the month of July, you can see where this registers on the chart below, particularly relative to Japan's newly realized negative industrial production growth rate.
I realize that Japan is "cheap", but countries with these dire fundamental underpinnings can get a lot cheaper as internally generated levels of cash flow erode.
*Full disclosure: I remain short Japan via the EWJ (etf) in my fund.
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