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“Men willingly believe what they wish.” 

- Julius Caesar


I think I have become way too cynical, but it’s getting harder for me to believe what I hear and read about the outlook for 2H10.  I normally give people the benefit of the doubt, but signs of the early stages of a renewed economic downturn are everywhere.  Yet, given what we read during the current earnings season, corporate America is not tuned in to the same channel or at least they don’t want to fess up to it.


This is what I’m seeing - a weakening labor market, softening consumer confidence, softening housing activity and retail sales, and an intensifying trade deficit - the early stages of a renewed economic decline. 


I’m not alone because in my back pocket I have the FX market, the bond market and the US consumer all seeing what I see.  For the time being, equity investors willingly believe what they want to. 


Currencies are a leading indicator for a country’s health and the US dollar is getting crushed.  The DXY is down 4.8% over the past month and looks to be down 4 of the last five days (trading down 72 bps today at the time of writing). 


While the dollar is getting crushed the EURO has rallied 7.0% (trading up 67 bps at the time of writing).  Knowing that a country’s currency is a leading indicator for a country’s health, what are the MACRO headlines in Europe today - European confidence in the economic  outlook rose to the highest in more than two years in July and German unemployment declined for a 13th straight month as an export-led recovery gathers strength.


Tomorrow, what will the headlines look like for the USA?


We’ll get the BEA’s overstated estimate of Q2 US GDP.  Bloomberg is showing a consensus estimate of 2.5% for the second-quarter, down from the 2.7% as reported for the first-quarter (and downward revisions are likely).  In 2Q10, a slower growth rate would be consistent with recent underlying MACRO data points.   I believe that risks are fairly high that the reported growth will surprise the consensus on the downside.


The following week we will get the July labor numbers and there is a good chance that they will be softer than an already soft consensus.  Bloomberg is posting expectations of a 100,000 decline in monthly payrolls.  I believe that number includes layoffs of temporary and census workers in July, which will be roughly 144,000 (per Census reporting).  This implies little or no growth in nonfarm payrolls, ex-census workers.  In June, payrolls declined by 125,000, gaining 100,000 ex-census.  Bloomberg also has the unemployment rate estimate at 9.6%, up from June’s 9.5%. 


Yesterday, the FED provided a very consistent message about the current consumer trends:


New York - Contacts generally indicate that sales of fashion items and apparel were particularly strong, whereas sales of big-ticket appliances were relatively sluggish.


Philadelphia - Most retailers said warm weather boosted sales of summer apparel, but sales of big-ticket appliances, remained weak.  “The consumer is still cautious and looking for value.”


Cleveland - Purchases of apparel and food products are doing well, while spending on discretionary items has weakened.


Richmond - A contact at a large home and garden chain reported that impulse buying fell, and that home remodeling purchases had scaled back dramatically as consumers “splurged small.” Overall, according to our District survey, big-ticket purchases and shopper traffic plummeted.


Atlanta - Although most merchants have reported improved conditions since the beginning of the year, the outlook among retailers was more subdued than in previous months.


Chicago - While spending on food and other necessities rose, spending on home-related and luxury items decreased.


St. Louis - Contacts in education services, air transportation support services, and the casino industry announced plans to decrease operations and lay off workers.


Minneapolis - In South Dakota, a mall manager noted that recent sales were mixed; consumers remained cautious as traffic continued to be driven by promotions.


Kansas City - Retailers expected sales to rise over the next three months and a continued downward trend in prices… Restaurant sales were flat compared to the previous survey, but the average check amount fell.


Dallas - Department store sales were slightly stronger than anticipated, but the pace is expected to moderate in the second half. Consumers continue to deleverage and correspondingly remain price sensitive.


San Francisco - While consumers remained focused on necessities and lower-priced options, reports indicated expanding consumer appetite for discretionary spending.


The most bullish commentary came from the San Francisco region.  I’m not sure what to do with that, knowing that California is in a financial mess, though comparisons are likely easier in that region.


In the last month, the corporate earnings season (and corporate storytelling) has driven the S&P 500 and the Consumer Discretionary index higher, up 2.9% and 2.6%, respectively.   This market rally has occurred against the backdrop of sluggish  macro headlines, but over the last three months, Consumer Discretionary was the second worst performing sector (-9.8%) next to Energy (-11.1%).  As Keith always says, markets don’t lie, people do.


Function in disaster; finish in style


Howard Penney


Good? - HP


Not much wrong with the quarter. Yes, hold was high in Macau but we knew that. The low Singapore hold was more damaging, yet they still made our Street high estimates. 



Overall hold issues almost washed – there was a +35MM revenue benefit and an estimated $7MM negative impact on EBITDA.  Reason is the low hold was in low tax and variable rate jurisdictions (Singapore and Las Vegas) vs. high hold in Macau where the flow through is lower.  Besides, we had already modeled high hold in Macau and so on the margin, Singapore was the surprise.  Even so, Singapore almost hit our EBITDA estimate.  Here are the property details.




While slot win per day was disappointing given Sheldon’s prior comments, overall property ramp and revenues were healthy.  Even better, costs looks lower than expected.  Sheldon’s $1BN target for 2011 looks achievable to us, although we swear he had said $1.2BN at some point.

  • Low hold impacted VIP revenues by $26MM and EBITDA by roughly $23MM
  • The implied rebate rate at MBS was 1.19% - calculated by taking gross gaming revenue of $236MM less reported casino revenues of $190.8MM
    • $3.88BN * 2.18% + $538.3MM * 21.5% + $482.3MM * 7.5% = $236MM
  • It looks like fixed costs were around $77MM

Las Vegas


Las Vegas net revenues of $276MM and EBITDAR of $66MM came in $4MM and $3MM below our estimates, respectively.  Slot volume was worse, more than offset by better hold.  Table drop was better but more than offset by low hold.  Occupancy was very encouraging.

  • While LVS claimed that low hold impacted them to the tune of $30MM we think the impact is much less.  If we use 20%, which is above the table hold that LVS had in Vegas in 2008 & 2009, the impact of low hold was $26MM on revenues – almost all of which flows down to EBITDA.
  • We estimate that Venetian’s table hold was 12% (notice the low daily win per table of only $2,155) and that the property did roughly $29MM of EBITDAR
  • We estimate that Palazzo’s hold on tables was about 15% and that the property did about $35MM of EBITDAR
  • Venetian removed 228 slots sequentially while Palazzo removed 10 tables sequentially
  • Operated expenses declined 1.3% YoY to $210MM


  • Venetian net revenue of $581MM and EBITDA of $193MM came in $8MM and $9MM above our estimates, respectively. The revenue beat was entirely driven by a lower rebate rate while EBITDA was better due to lower fixed costs.
    • High VIP hold benefited revenues by $50MM and EBITDA by $26MM (given the variable commission component)
    • High Mass hold benefited revenues by $7MM and EBITDA by $4MM. 
    • We estimate the direct VIP play was 24% of total RC volume, however, total RC volume was actually down 2% YoY. We suspect this is why Venetian is going to focus more on adding junkets and that their direct play % may decrease in the future.
    • Despite high hold, the rebate rate was only 97bps
    • Implied fixed costs of $92MM
  • Sands net revenue of $302MM and EBITDAR of $81MM came in $1MM and $6.7MM above our estimates, respectively--with the delta in EBITDA driven by lower commission and lower fixed costs.
    • High VIP hold benefited revenues by $14MM and EBITDA by $5.5MM
    • We estimate the direct VIP play was 14% this quarter
    • Implied fixed costs were $48MM
    • Mass drop only had 1.4% YoY growth despite huge market growth
  • Four Seasons net of revenues of $144MM and $33MM EBITDA fell short of our estimates. Our estimates assumed lower direct play and a higher hold rate, which would have produced higher EBITDA on the same gross revenue number. We also assumed higher non-gaming revenues. It also appears that despite a higher mix of direct play, commissions were higher than we estimated.
    • High VIP hold benefited revenues by $11MM and EBITDA by $3MM
    • High Mass hold benefited revenues by $5MM and EBITDA by $3MM
    • We calculated direct VIP RC at 50% of total RC
    • Implied fixed costs were $26MM


2010 outlook



  • We’re at $275MM of net revenues and $71MM of EBITDAR for Vegas in 3Q2010. 3Q09 is a very easy comp given that table hold was only 12.2%.   
  • 4Q09 table hold was also on the low side at 17.1%, so in theory, that’s another easy comp.
  • For FY2010 we’re at $1.17BN of revenues and $312MM of EBITDAR for the Vegas operations.


  • Sands:  FY2010 $1.17BN of revenues and $292MM of EBITDA. They have tough hold comps in 2H2010--3.4% and 3.1% in 3Q and 4Q respectively.  They’ve also basically flat-lined on mass market drop, although slot handle has grown nicely and fixed costs have come down quite a bit.
  • Venetian:  FY2010 $2.25BN of revenues and $700MM of EBITDA.  We suspect that Venetian will bring in more junkets since their VIP RC growth has stagnated as they have focused on growing direct play at the expense of losing market share. 
  • FS:  FY2010 $514MM of revenues and $96MM of EBITDA.  FS has very hold easy comps in the 2H2010 of 2.3% and 2.1% in 3Q and 4Q, respectively.


  • We’re at $450MM of net revenues and $223MM of EBITDAR in 3Q2010 
  • For FY2010, we’re at $1.15BN of revenues and $565MM of EBITDAR


Choppy outlook given management’s recent conference presentations in June, here is a look at DIN’s guidance going into earnings tomorrow.


General commentary

  • Kids Eat Free promotion at IHOP for the month of April – impact on dinner traffic?
  • $5 coupon with purchase of $25 gift card
  • DIN is committed to the strategic objective of transitioning Applebee’s into a more highly franchised restaurant system over time

To that end DIN announced on July 23rd that the franchise, Apple American Group LLC agreed to buy 63 Applebee’s in Minnesota and Wisconsin.  Gross proceeds are estimated to be $32 million.


Guidance Goal Posts

  • The full year tax rate is expected to be approximately 34% - in line with earlier guidance
  • DIN expects to continue to use FCF to opportunistically repurchase debt when available
  • Full year stock based comp is expected to be ~$13m
  • FY10 Free Cash Flow between $118m and $128m
    • CFFO between $145m and $155m
    • $16m from run-off of long-term notes
    • Capex between $20m and $23m
  • FY10 Operating margin between 13.5% and 14.5%
  • Applebee’s FY10 domestic system same-restaurant sales between flat and 4%
    • 25-30 new franchise restaurants opening this year
  • IHOP’s FY10 domestic system same-restaurant sales between -1% and +1%
    • 60-70 new franchise restaurants opening this year
  • FY10 consolidated G&A expense to range between $158m and $161m.  In Q&A on the most recent earnings call management indicated that this will not be smooth and that, for modeling purposes, “would not flat [sic] that number through the remaining quarters”.
  • Food costs flat to slightly favorable for FY10


Howard Penney

Managing Director

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PFCB is facing easy comparisons in 3Q10 on many fronts.  At the same time, trends are getting better at the Bistro, which should make for a strong third quarter.


I always look forward to hearing Co-CEO Bert Vivian’s candid and often colorful comments about reported quarterly results and current trends.  Early on in the call, I could not get a read on his tone because although he said that business was improving at the Bistro, he also sounded less than confident in the company’s ability to achieve its current FY10 $2.00 EPS guidance, saying, “If our sales momentum continues, we stand a reasonable chance of achieving roughly $2 in earnings.  If sales waffle in the back half of the year, we will not get there.”


His tone about current trends was less difficult to read, however, when he said he was feeling “fat, dumb and happy” about July trends.  We later learned that July comps are running up 3% at the Bistro and +2% at Pei Wei.  It is important to remember that PFCB is facing very easy comparisons in 3Q10 from a Bistro comp, margin and YOY earnings growth perspectives.  In 3Q10, the Bistro is lapping a -8.5% comp number from 3Q09, but we know July of last year started out stronger with AWS down about 7% (AWS came in -9.2% for 3Q09).  To that end, +3.0% in July implies stronger two-year average trends since the end of the second quarter, on top of the 130 bp sequential improvement realized at the Bistro during 2Q10. 


Traffic turned positive at the Bistro during the first quarter and going into 2Q10, I was a little concerned about the company’s ability to maintain that momentum based on management’s plan to implement a 1%-2% price increase in May.  Traffic continued to be positive during 2Q10, up 2.6% and held steady throughout the quarter. 


The Bistro is seeing an improvement in trends across all of its dayparts.  Specifically, management said that lunch business is stronger and that both weekday and weekend dinner trends are getting better.  The company did not break out what is driving these better results, but partly attributed the stronger weekday lunch and dinner to increased business spending and the sequentially better weekend dinner traffic to increased social spending.  Geographically, the company is experiencing stabilizing to slightly improved results in its California, Nevada and Arizona markets.


From a restaurant level margin standpoint, the Bistro continued to face some YOY pressure with margin declining nearly 100 bps.  This was a huge improvement from 1Q10 when margin was down 300 bps.  To recall, management attributed 180 bps of that decline to inefficiencies around the Happy Hour rollout.  During 2Q10, margin improved largely as a result of better execution during Happy Hour; though the May price increase helped as well.  Given that the Happy Hour margin did not normalize until late in 2Q10 (in June), restaurant-level margin should continue to improve during 3Q10 and turn positive, particularly if same-store sales trends continue to improve.


Comp trends continued to improve at Pei Wei in 2Q10 as well, with two-year average trends increasing about 150 bps from the prior quarter.  It is concerning, however, that traffic fell off so significantly in May and June from April levels.  The deceleration in traffic followed a 1% price increase in April; though management did not specifically attribute the slowdown to that price increase.  The +2.0% comp at Pei Wei in July also points to a slight deceleration in two-year average trends since the end of 2Q10.  Pei Wei is lapping a -0.7% comp from 3Q09, but like the Bistro, trends started out the quarter stronger with AWS -1% in July 2009 and -2% for the entire quarter.


As I already said, PFCB is facing easy comparisons in 3Q10 on many fronts.  At the same time, trends are getting better at the Bistro, which should make for a strong third quarter.   Given the softening consumer confidence metrics that have emerged recently, we will have to watch closely to see if the current sales momentum, which Vivian underscored as being essential for the $2.00 earnings target to be met, can be maintained.  Relative to our restaurant sigma chart, shown below, PFCB should move up and to the right into the “nirvana” quadrant (positive same-store sales and growing YOY restaurant level margin) during the back half of the year after starting out the year in the “deep hole” quadrant (negative same-store sales and declining YOY restaurant level margin).




Howard Penney

Managing Director


In preparation for the WYNN Q2 earnings release on July 29th, we’ve put together the pertinent forward looking commentary from WYNN’s Q1 earnings release/call and subsequent conferences.



Wynn Las Vegas Pre-announcement


On July 21st, Wynn Las Vegas pre-announced their results ahead of a new issue and tender for their 2014 notes.  For 2Q2010, Wynn Las Vegas reported net revenues of $318 million and Adjusted property EBITDA of $65.1 million.

  • “The EBITDA decline in the second quarter of 2010 is primarily attributable to higher healthcare and other employee benefit costs, customer acquisition expenses, as well as repairs and maintenance costs to preserve the property's overall quality.”
  • “Table games drop decreased 1.8% from the comparable period in 2009 to $485.9 million and hold percentage declined modestly from the 20.7% reported last year to 20.0% in the current quarter.”
  • “Slot machine win of $41.1 million was 1.8% lower than the comparable period in 2009.”
  • “Wynn Las Vegas achieved an ADR of $197 for the quarter, compared to $218 in the second quarter of 2009. The property's occupancy was 92.6%, compared to 86.6% during the prior year period, generating REVPAR of $182 in the 2010 period (3.2% below the second quarter of 2009).”


Post Earnings Conference Commentary

  • “Unfortunately, the market in Las Vegas is not so good. So outperforming here hasn’t really meant a whole lot. And our tone has been from the beginning of the financial crisis, in 3Q08, pretty much the same: we think that things are not getting worse in Las Vegas, particularly this year. We think summer is going to be tough and for us to make any real forecast of any recovery right now is premature. It’s not the right thing to do. This market’s been bombed with new supply and there’s another high-end hotel opening in December.”
  • “For us to make any call on Las Vegas right now on a turnaround would be premature. I don’t think anybody is really seeing that. You can point to 4 or 5 good things, yeah, we’ll have more convention room nights booked than we did before. But in the end, everybody’s rates have been cut in half and to retrain customers to get that leverage back, it’s going to take a long time.”
  • Macau:  “May looks like an unbelievable month, maybe the best ever.  I don’t think that’s news to anybody in this room. What might be news is that Encore has been very well received. It opened April 21.... We expanded our total VIP capacity by over 40%, and it has been very well received.”
  • Cost of room renovation at Wynn Las Vegas: “I can tell you it’s less than, just in terms of scale, it is less than $100 million.”
  • Las Vegas:  “The summer, I think, is going to be tough, as I said. I think a lot of people had maybe hoped that the summer would be better, but hope doesn’t seem to pan out in this town. People have been hoping that things will get better for years. Convention business, like I said, the lead volumes are up, bookings are up, all those things are back. So there are small; they’re encouraging signs but in terms of rate, increasing rate and things like that, we may have a slight increase. That’s plausible. People are saying by the end of the year.”
  • “What I would say is that City Center has impacted the market in terms of rate and occupancy. Without a doubt they have. It’s more capacity and they’ve been leading with price. They are priced lower than Bellagio and lower than Wynn and it’s hard when more product comes on and it’s a nice product. It’s fine. Our customers have continued to prefer Wynn, is what we’ve seen.”
  • “We haven’t cut our service levels like we could have. We’re running 9,300 FTEs here. That’s a lot. I think ARIA just announced they wanted to go to 6,000. That’s a big difference. Maybe they can, maybe they don’t need as many people to offer the same level of service. I don’t know, but – oh, it’s at 60% occupancy too.”


1Q2010 Earnings Release/Call



  • [About rate in Las Vegas] No, we’re not seeing any real improvement in rate going forward, it’s fairly stable. Our feeling is that with the growth in capacity that we absorbed in the early part of the first quarter, that’s impacted rates city-wide, certainly for us, and we don’t see that really changing through the summer.”
  • Why slot handle was so weak?
    • A: “The comp was a bit tough because we were going up against the opening of Encore where we had a tremendous amount of novelty and local traffic that came through the building and so we benefited from that. And then we are…nearly done with constructing our new Beach Club which basically closed down the whole front of Encore which has impacted what walk-in traffic we were able to generate off of the strip… And that comes to an end in four weeks (end of May).” 


  • “So we’re going to build on Cotai… We will build the destination resort and that will complement the other things that we’ve built in Macau up till now. But …it wouldn’t open until 2014.”
  • Q: “What happened with controllable costs in Macau during the quarter?”
    • A: “I think it’s a little over $1 million a day run rate versus 990 or so in the fourth quarter.” 


In preparation for the PNK Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PNK's Q1 earnings release/call.



YouTUBE from Q1

  • “So I would tell you that I wouldn’t feel comfortable in saying that this is sort of the base [re: 1Q2010 EBITDA]. I would tell you we’re at the beginning of -- good results. But we’re at the beginning of really taking a look at how do we manage our company in a way that just doesn’t cut expenses out thoughtlessly?” 
  • “In 2010… we think the total spend at River City on a cash basis will be $53 million for the year. In Baton Rouge, we’ll get into approximately $45 million of that project this year with obviously the lion’s share of that spend in 2011. And then, we’re going to see uptick maintenance in CapEx this year, to approximately 40, maybe $45 million for the year as we continue our slot replacement cycle and maintaining our properties at very high levels.”
  • Q: “Wind-down cash costs associated with Sugarcane Bay?”
    • A: “Ballpark is about $10 million, of which $4.5 million to put things back in service. As you know, we tore up the facility in anticipation of doing the footing and foundation for the hotel. But approximately $10 million is your number. Some of that we’ll see in Q1. Bulk of it will flow through during Q2.”
  • “Corporate expense, I don’t think we can nail that down for you yet. We are working on that. For example, with the Falcon Jet sold last week, you’re going to see some fairly significant numbers come off the P&L associated with that specifically. But you won’t see that until Q2 because of an existing aircraft – hanger lease, excuse me – that goes through June, et cetera closing down that aviation department, those kinds of things. Obviously, the number you see on this P&L reflects approximately $1 million of severance as well... I would tell you, as reflected in the comments and the press release, we expect more progress there.”

  • On corporate expense: “What I can tell you is that we’re working on it pretty hard. And I feel like we are still a little bit bloated where we are. Maybe that’s the wrong word. We have slimmed down nicely in the last several months. I believe there’s more to come, but I can’t promise you a number.”

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