Reading Europe’s Pulse

Position:  Bullish Bias on Germany (EWG)


Looking at the data out of Europe over the last two days one could be led to conclude that the fundamentals look great: European economic confidence rose to the highest level in over two years (see chart below), Germany’s unemployment rate declined for the 13th straight month, German and Swedish retail sales were up 2.8% Y/Y and 3.1%, respectively, and even Spain’s total housing Permits improved on a month-over-month and year-over-year basis!  Further, there have been some impressive Q2 earnings beats from European bellwethers.


We’re however cautious on the European outlook in the back half of 2010 for a number of factors, including: growth prospects due to austerity policies; Housing Headwinds (in particular in the US, UK, and Spain); the winding down of the earnings season; the risk of sovereign debt leverage on European banks that the European stress tests largely ignored;  and slower growth in the US—our forecast is for annual growth of +1.7% in 2010 and 2011, well lower than consensus of 3-4% range for 2010. 


Interestingly European equity markets largely sold off on the positive European confidence numbers yesterday. Today, we’re seeing follow-through selling on the back of the slowing Q2 US GDP print. With markets highly sensitive to US and Chinese data, we believe that the US government’s failure to address its rising deficit and debt levels could drag markets down in 2H10. Certainly the lack of confidence in US policy and economic health is showing up in the data: 2 year US treasury yields are hitting rock bottom!


Currently, we’re not invested in Europe in our virtual portfolio as we're waiting and watching for confirmation from the DAX and FTSE.  The FTSE broke its intermediate term TREND level of 5298 today, while the DAX is holding its level of 6072; we’ll be waiting for confirmation of the moves before we act.  We sold our long position in the Pound via the etf FXB on 7/28 at its immediate term over-bought level of $1.55 and would buy it back at $1.52.  As a note, our immediate term over-bought level on the EUR-USD is $1.30, and we’d buy it back off these oversold levels at $1.27 (intermediate term TREND support).


Matthew Hedrick



Reading Europe’s Pulse - image001

R3: Hoop Trends


July 30, 2010





There was some noise in the market yesterday suggesting that basketball footwear trends are getting worse and this is impacting trends at Foot Locker.  The NPD data below shows quite the opposite trend.  One additional point on the basketball category, which in general has been a laggard relative to performance running.  The real opportunity for the category is building and will be a Fall event.   The small, but relevant, launch of UA’s shoe along with whatever Nike is working on to juice sales of the “Big Three” in Miami is more excitement in the category than we’ve seen in years.  Seasonally, hoops is also more 2H than 1H weighted.


R3: Hoop Trends - R3 7 30 10 2


R3: Hoop Trends - R3 7 30 10 1




  • Due to recent increases in cotton prices, Carter’s now expects finished good costs to rise by 10% for the company’s spring ’11 deliveries.  Selective price increases will be taken to offset the inflationary pressures.   On the footwear side of things, Steve Madden suggested that they are expecting a 5% increase in costs.
  • Despite tough comparisons with last year’s record boot season, Steve Madden remains bullish on prospects for growth in the category this year.  The company noted that early reads drawn from Nordstrom’s Anniversary Sale, Macy’s pre-sale, and their own “Sneak Peak” all indicate boots should have another solid season.   Perhaps what is most interesting here is that the bullish trends are coming at a time when the weather has been least conducive to facilitating sales of the product category.
  • Keep an eye on Hermes China luxury sub-brand, Shang Xia, which launches in September.  The brand is 100% locally designed, sourced, and managed locally in China.  While specifics are still scant regarding the line, speculation suggests it will launch with housewares, accessories, and furniture.  While the first store is rumored to be in Shanghai, there may be plans to eventually open a store in Paris, presumably to add authenticity to the “luxury” status of the start-up brand.



When a Box Isn’t Just a Box - All eyes will be on the West Coast next week, where Bloomingdale’s and Nike unveil prototypes in Santa Monica Place in California. In the case of Bloomingdale’s, it’s a beachy version of the department store’s contemporary-driven SoHo unit in Manhattan, which the company hopes to replicate elsewhere. At Nike, “there’s a new mission on retail stores now,” said a source. “They want to take control of the environment where their products are sold.” Jeanne Jackson, former Banana Republic president and former chief executive officer of and Gap Inc. Direct, was a Nike Inc. board member but last year shifted into the role of president of direct-to-consumer and has been leading the retail effort. The two-story, 20,000-square-foot Nike store will provide sports teams customized products in 115 styles, market-tailored product offerings, community resources and the introduction of Nike+ Run Club, and is Nike’s first multicategory opening in the U.S. since the last one in 1999 in Denver, according to Nike media relations manager Jacie Prieto. “We have been approached in the past six months by maybe a half-dozen major brands to do new prototype work,” said Tom Bowen, a principal of Callison, the architecture and design firm. There is a surge among strong retailers looking at ways to position themselves ahead of the competition through new prototypes. We also see much more focus on making prototypes internationally adaptable. <>

Hedgeye Retail’s Take:  With limited square footage growth in the future for many retailers, the importance of innovative and differentiated concepts is reaching new heights.  Fortunately for the consumer, it appears we have turned the corner to some degree on investment in innovation, something that was surely missed over the past 2 years.


Sears Lures Youth With Music - Now + Here, a new department that launched Thursday at Sears stores nationwide, aims to seduce that most fickle of audiences — juniors and young men. “This is part of our overall apparel transformation,” said Melanie Henson, chief marketing officer of Sears Holdings Corp. The retailer has begun to upgrade its apparel business under John Goodman, executive vice president of apparel and home, who joined Sears about nine months ago. The new Now + Here areas, located at the mall entrances of Sears units, marries two of the demographic’s main pursuits — fashion and music. Sears partnered with Live Nation, the largest producer of live concerts in the world, to give Now + Here an authentic music component. The retailer is tapping into fall’s hot trends with brands such as Battle Gear, Girly Grunge, Biker Chic and Sweet Dreams. <>

Hedgeye Retail’s Take:  Sounds like a mini Hot Topic shop-in-shop on the way into the store and we all know what the iPod has done to the music industry.  Clearly this effort is aimed at getting a younger male to cross the Sears lease line, but we’re not convinced.


Wage Hikes in Bangladesh Move Closer to Reality - Following months of violent protests in Bangladesh’s garment industry, Labor Minister Khandaker Mosharraf Hossain said Thursday that the government would nearly double the wage rate for the country’s three million garment workers in November. The move came under intense pressure from workers, workers’ rights groups and the U.S. and European Union at a time when retailers and brands are increasing apparel production there to offset rising costs in China. The garment industry, which exported $12.5 billion for the 12 months through June, accounts for nearly 80 percent of Bangladesh’s annual exports. <>

Hedgeye Retail’s Take:  As expected, another reason for apparel inflation.


Location-based Mobile Advertising is Here - Google is stepping into location-based advertising with the introduction of mobile banner add that show users nearby services. The unit is an offshoot of AdWords' location extensions. It allows advertisers to attach their phone numbers and business location on an expandable map. The new ad format will run on sites and applications that are part of the Google Display Network. Users of smartphones like iPhone and Android will see a text call to action and small thumbnail graphic. Tapping on the ad expands it to show a Google Map with the business plotted and number displayed. Google will only charge advertisers when users tap to call the business or visit the advertiser's mobile site. <>

Hedgeye Retail’s Take:  At some point there has got to be some consumer backlash from all this technology tracking a consumer’s every move.  In the meantime, this adds yet another layer of efficiency to the marketing process for both the advertiser and the ad server.


Opposition to the Delahunt Bill - As some members of Congress gathered today to promote the recently introduced Delahunt bill to mandate sales tax collection by Internet retailers, others pushed a new House resolution by Rep. Paul Hodes (D, NH) that opposes it. The Hodes resolution, which has bipartisan support from four representatives, runs counter to House Rule 5660, The Main Street Fairness Act, which was introduced on July 1 by Rep. William Delahunt (D, MA) and calls for Congress to support the Streamlined Sales and Use Tax Agreement and authorize states that abide by that agreement to force Internet and catalog retailers to collect and remit sales from customers in those states. In effect, the Delahunt bill seeks to overturn the status quo that says retailers don’t have to collect sales tax in states where they don’t have a physical presence, such as stores, offices or distribution centers. <>

Hedgeye Retail’s Take: No one said this was going to be an easy battle, but with States looking to fill their budget gaps, it’s an easier argument than it has ever been over the past 20 years.


AEO Online Snafu  - American Eagle Outfitters three youth-focused apparel brands—American Eagle Outfitters, Aerie and 77kids—were unable to sell online for three days last week. The retailer’s brands, all of which are featured online through the main web site, were down from approximately 5 p.m. Eastern time on Monday, July 19, until approximately 6 p.m. on Thursday, July 22, according to Gomez, which monitors the performance of web sites as a division of Compuware Corp. American Eagle, No. 51 in the Internet Retailer Top 500 Guide, posted a notice to site visitors during the downtime: “We’re making updates to our sites. Free shipping on us when we’re back, through Monday, July 26.”

Hedgeye Retail’s Take:  Sounds like something went terribly wrong for the site to be down that long.  While we are pro ecommerce, this incident clearly highlights the risk of running in theory a “single” store platform.  Or, maybe we’re reading into this too much and AEO was just stealing a play from the Apple playbook in taking down the site to generate buzz.


Rawlings Goes Football - The National Football League has signed Jarden's brand Rawlings to a multi-year deal as exclusive licensee for select tailgating products. The Rawlings line will include tent canopies, grills and chairs. The deal also includes an extension deal, beginning in 2011, to be managed by Jarden Sports Licensing. The agreement expands the partnership with the NFL across a number of Jarden's brands, including Coleman, Bicycle and Shakespeare. Non-exclusive tailgate products will include coolers, stadium seats and footballs—all to be merchandised under the TLG8 brand umbrella and its "Real Brands for Real Fans" tagline. The entire collection will launch in April 2011. <>

Hedgeye Retail’s Take:  We can’t think of a better portfolio of brands than Jarden’s for this partnership.  Unfortunately the fan will have to wait an entire NFL season before the entire collection launches for the 2011 season.



US-China Relations: The Rift Is Growing at its Fastest Pace In Decades

"It's not you, it's me. Nobody ever says it's them, not me. If it's anybody, it's me!"

George Costanza


Conclusion: The political rift between the U.S. and China is growing, expediting on the margin the U.S.’s secular decline as the world’s superpower. This does not bode well for U.S. Treasuries. In addition, as a result of its economic outlook, capital is pouring into China like never before.


Position: Long the Chinese yuan via the etf CYB. Short the U.S. dollar via the etf UUP.


In the last 24 hours, China has been having the “the talk” with its largest debtor. Yesterday, via its state-run newspaper, the People’s Daily, China issued some alarming commentary regarding Sino-U.S. relations. Notable excerpts from the article read:


Lip service is far from enough to boost the development of Sino-U.S. relations. If Washington cannot find a way to recognize and accept China's peaceful rise onto the world stage, bilateral ties will be like a roller coaster full of ups and downs… Issues such as arms sales to Taiwan, Google censorship, RMB exchange rates as well as finger-pointing about economic responsibility show [that] Washington still seems confused and inpatient about relations with China.”


Furthermore, the articles cites Ian Bremmer, an American political scientist specializing in U.S. foreign policy, saying: , "America and China will have more than ever to gain from closer political and commercial ties, and must take steps to avoid a Cold War, or worse."


China continues to move counter to U.S. foreign policy wishes. In conjunction with yesterday’s People’s Daily article, China signed an economic and technical cooperation agreement with North Korea – one week after U.S. Secretary of State Hillary Clinton announced further trade sanctions targeting government officials and foreign banks that help sustain North Korea’s weapons policy. This is the latest step in a growing list of actions taken by the Chinese government this year to exert its dominance over the Asian region. Those actions have included cutting off high level military exchanges with the U.S. in January and refusing to back the U.S. in blaming North Korea for the sinking of a South Korean warship in March. Just last week, China’s Foreign Minister, Yang Jiechi, described Clinton’s comments on making sovereignty in the South Sea a “leading diplomatic priority” as “virtually an attack on China”.


Today, Sino-U.S. relations took a decisive turn to the worse, as China declared  its “indisputable sovereignty” over the South China sea and held naval drills in the waters, pushing back against growing U.S. influence in the region. In conjunction with the drills, China’s Ministry of Defense released the following statement:


“China has indisputable sovereignty of the South Sea and China has sufficient historical and legal backing to underpin its claims. It opposes efforts to internationalize the issue and will resolve differences through “friendly negotiation… China opposes any planes or warships that engage in activities that will compromise China’s security either in the Yellow Sea or other seas near China.”


Today’s drills and statement follows joint U.S.-South Korea naval drills from earlier this week in the Sea of Japan, which were designed to deter North Korea. Further drills are planned in the Yellow Sea – off China’s eastern coast. Judging by the statement above, China is not likely to let that happen without consequence. China considers its neighboring seas “its own”, dismissing claims from other Asian countries to islands such as the Spratlys. Recently, China told Exxon Mobil Corp and BP Plc. to halt exploration in areas that Vietnam considers part of its territory. China, aware that actions like this may push its neighbors into U.S. arms, is in the process of building its ocean fleet to extend its military influence far beyond its borders – should the U.S. try to intervene. All told, the South China Sea sees about half the world’s merchant fleet by tonnage each year and it is home to potential untapped oil and gas reserves, so “winning” the Battle of the South Sea is very important for the Chinese economy and its future growth outlook. Some $867 billion in U.S. Treasury holdings suggest that China may have the upper hand.


Three Charts Geithner and Bernanke Don’t Want You To See


Chart One – China Growing; U.S. Slowing:


US-China Relations: The Rift Is Growing at its Fastest Pace In Decades - 1


As the charts points out, China continues to take share from the U.S. as a destination market for European exports, which will continue to lead to greater investment and capital inflows from Europe to its growing economy. This is exactly what we are seeing as it relates to the recent earnings and guidance commentary from companies across the globe: 

  • Publicis Groupe SA is targeting China and working with Chinese companies to help make China “one of its most important” advertising markets.
  • Sony Corp, the world’s third-largest television maker raised its full-year earnings forecast, citing continued evidence of strong demand in China.
  • Volkwagen AG, Europe’s largest carmaker, reported its largest quarterly profit in two years on higher demand in China (profit in China up 168% Y/Y); The CEO recently announced plans to build two new plants in China to double production capacity, which would help it offset “stagnating sales in Europe”.
  • Volvo Cars’ success will “hinge on building a manufacturing plant in China”, according to its CEO; Volvo’s 1H10 sales grew 88% in China vs. 20% globally.
  • Rival PSA Peugeot Citroen, Europe’s second-largest carmaker, recently signed a joint venture China to boost production in sales in the country.
  • Nissan Motor Co., Japan’s third-largest automaker posted a first quarter profit, aided by “growing sales in Asia” (sales in the region, excluding Japan, grew 62% Y/Y in 1Q10 vs. only +23% Y/Y in North America); The company plans to raise annual production capacity in China by 70% in two years. 

All of these plans for increased investment are occurring in spite of China’s passenger car sales slowing to its slowest growth in 15 months in June, in addition to a looming negative backdrop for U.S. GDP growth. Should the U.S. slow, it would no doubt have a negative effect on the Chinese economy (the U.S. is China’s largest export market). Luckily for China bulls, China Finance magazine published a report on July 3rd suggesting that spending under the government’s 4 trillion yuan stimulus packages aren’t yet fully allocated and adjustments can be made based on future economic conditions. Conclusion: China is likely prepared to weather a slowdown in the U.S. economy.


Chart Two – China Dumping U.S. Treasuries:


US-China Relations: The Rift Is Growing at its Fastest Pace In Decades - 2


As this chart points out, China has been a net seller of U.S. treasuries in the period from July ’09 – May ‘10. Since August 2009, foreign holdings of U.S. Treasuries have increased from $3.5 trillion to $3.9 trillion, which is growth of 11.4%.  In the same period, Chinese holdings of U.S. Treasuries have declined from $936.5 billion to $867.7 billion, or 7.7%.


While the math doesn’t lie, the Chinese certainly have been. China has been using market concern over E.U. sovereign debt and the world’s “flight to safety” as a great selling opportunity to unload treasuries an talk them up at the same time. In a recent publication by China’s State Administration of Foreign Exchange the Chinese talked down any implications of mass selling, suggesting that market concern that China may consider “nuclear option” of dumping its Treasury holdings is “completely unnecessary”.


Chart 3(a) and 3(b) – Dollar Down; China Up:


US-China Relations: The Rift Is Growing at its Fastest Pace In Decades - 3


US-China Relations: The Rift Is Growing at its Fastest Pace In Decades - 4


The two charts above highlight both the secular decline in the U.S. Dollar as the world’s reserve currency and the cyclical decline of investor confidence in the U.S. Dollar. The Bubble in U.S. Politics combined with burgeoning U.S. debt and deficits has given China its best opportunity to advance its goal of making the yuan a global currency and reducing its reliance on the dollar. Since December of 2008, China’s central bank has signed at least $650 billion yuan of swap agreements with countries around the world, ranging from Argentina to South Korea. Its most recent swap agreement was a three year deal with Singapore (which we are long of) worth 150 bilion yuan ($22 bil). The agreement, which may be extended, aims to facilitate trade and investment between the two nations, according to the People’s Bank of China. Market demand for the yuan continues to grow as well. On Wednesday, China sold 28 billion yuan of 30-year debt which drew bids for 1.91 times the amount on offer (up 35% from the last offer on 6/18).


At the end of the day, China is a big country with a lot of people (1.3 bil. to be exact) that is increasingly on its own track towards further economic development. And based on recent and long-term market dynamics, any attempts for the U.S. to stand in her way will likely  be futile. As Warren Buffet once said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Keeping that in mind, Hedgeye is long the Chinese yuan and short the U.S. dollar.


Darius Dale



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As we look at today’s set up for the S&P 500, the range is 43 points or 2.3% (1,076) downside and 1.6% (1,119) upside.  Equity futures are trading below fair value in reaction to some weakness across Asian and European markets following slightly disappointing economic data out of Japan and Germany. Today's highlight will be Q2 Advanced GDP where a pronounced declaration in growth will reawaken deflationary concerns.

  • ADVANCE/DECLINE LINE: +152 (+1238) - Breadth positive in a down tape
  • VOLUME: NYSE - 1165 (+16.03%) - Volume up nicely on a down day.
  • SECTOR PERFORMANCE: Two sectors up XLF and XLE - Safety is not so safe XLU and XLP bottom two sectors.
  • MARKET LEADING STOCKS: Citrix Sys +19.73%, Ameriprise Fin +12.28% and LSI Corp -13.92%, Akami -12.90%


  • VIX 24.13 (-0.49%) - The VIX is broken on TRADE.
  • SPX PUT/CALL RATIO - 1.74 down from 1.99 (low on 07/15/10 of 0.87)


  • TED SPREAD - 31.5519 to 31.5521
  •  3-MONTH T-BILL YIELD .15% to .14%
  • YIELD CURVE - 2.3996 to 2.3922


  • CRB: 270.20 1.50%
  • Oil: 77.77 1.8% (down for 3 days)
  • COPPER: 325.80 (1.4%) – looking to be up 8 of the last 9 days - trading above its TRADE line - BULLISH for growth expectations
  • GOLD: 1,164 (0.32%) - Gold has decisively broken the Hedgeye intermediate term TREND line of support (1197)


  • EURO: 1.3080 (0.64%)  - Up 5 of the last 6 days - trading above the TRADE line
  • DOLLAR: 81.636 (-0.66%) - BEARISH formation 


  • ASIA - Most markets followed Wall Street down.  Profit-taking finally set in; China declined 0.4% (-19.5% YTD) and Japan down-1.6% (-9.6% YTD). 
  • EUROPE - Major indices are lower in quiet trade as investors wait for US GDP numbers later in the session for clues as to near term direction.  Greece and Spain leading the way down. 
  • In Europe, earnings this morning have by-and-large beaten estimates. 
  • EASTERN EUROPE declining - Russia down 1.3% and Turkey down 1.6%.
  • LATIN AMERICA - Argentina posting a positive divergence up 1.3%.
  • MIDDLE EAST/AFRICA - Mixed with Egypt up 1.45%. 

THE DAILY OUTLOOK - levels and trends













Growth and Progress

“Without continual growth and progress, such words as improvement, achievement, and success have no meaning.”

-Benjamin Franklin


Given the amount of time I spend ripping on American professional politicians, I’m happily surprised to say that the most enjoyable read I’ve had this summer was Walter Isaacson’s “Benjamin Franklin – An American Life.”


I actually picked the book up off of my wife Laura’s side of the bookshelf on a Saturday morning (my side is long Canadian hockey year in reviews - hers, American history), and she’d already flagged a page with the following passage:


“But the image he created was rooted in reality. Born and bred a member of the leather-aproned class, Franklin was, at least for most of his life, more comfortable with artisans and thinkers than with the established elite, and he was allergic to the pomp and perks of a hereditary aristocracy. From these attitudes sprang what may be Franklin’s most important vision: an American national identity based on the values and virtues of its middle class.”


Franklin’s story is All-American. It’s accessible. And it’s believable. Every one of us wants to live a successful life that has meaning. “Improvement, achievement, and success” are certainly goals that both my family and Hedgeye teams have. “Without continual growth and progress” however, we will pass up the precious opportunity of life by telling ourselves stories that we are making a difference.


That’s my problem with American government right now. That’s why I go off on it so often. Our economic growth is based on a false premise that ‘government is good’ and it has the ability to bail us out of all our problems. As a result, there is no progress in financial markets right now. Instead we get what our Compliance Czar, Moshe Silver, calls Dodd-Frankenstein “financial reform.”


Barney Frank and Chris Dodd are not men of Ben Franklin’s definition of virtue. They lie. You Tube is one of America’s greatest modern day innovations partly because it has offered us this plain and ugly truth.


Whatever this “government stimulated” growth is that gets reported in this morning’s Q2 GDP number, I can proactively forecast this about it – the GDP number will reveal nothing in terms of the standard of progress that this country should hold itself accountable to.


Never mind the stock market being Wall Street and the manic media’s bogey for progress anymore – for we hard working Americans (I have my green card!) who have actually been creating American jobs for the last 3 years as opposed to bitching about them, here’s what we are looking for as a multi-factor scorecard for American Growth and Progress:

  1. Strong Employment
  2. Strong Currency
  3. Strong Rates of Return

This isn’t political commentary. This is a pragmatic plan. If you’re a professional politician who has been forwarded this email and you don’t like being called names or being called out – too bad. Quit whining, pointing fingers, and fear mongering and fix these 3 things. You actually have a job with wage growth, so start earning your keep.


America has no Growth and Progress right now because we have none, never mind one, of the above:

  1. Employment – Given yesterday’s weekly jobless claims number of 457,000 we can be assured that the unemployment rate for July will remain above 9%. On a net basis, there have been ZERO net jobs added in this Fiat Republic in the last decade.
  2. Currency – the US Dollar has been down for 8 consecutive weeks, losing -9% of its value since early June, solidifying the long term TAIL of wealth oriented risk that remains in this country of debauching the currency of our citizenry.
  3. Rates of Return – sorry middle class Americans with a hard earned savings account. Short term Treasury rates just hit another all-time low this morning and if you want to get yourself levered long another 301k, the SP500 has a negative return for 2010 of -1.3% YTD too.

We get that professional modern day politicians are more focused on their job security than they are showing “continual growth and progress” on these 3 critical scores. As the Benjamin Franklin reminds us, “anyone who trades liberty for security deserves neither liberty nor security” and when it comes to jobs or rates of return in this country today, ain’t that the sad truth.


My immediate term support and resistance levels for the SP500 are now 1076 and 1119, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Growth and Progress - frank


Wynn Macau may have indeed missed whisper expectations but those expectations were probably too high due to bad modeling. We don’t see any signs of accelerating commissions or promotional activity.



We thought Wynn Macau’s $216MM EBITDA was a solid number above our estimate of $211MM. Unfortunately for WYNN, whisper expectations were probably too high.  At least one analyst had recently gone to $235MM and some on the buy side were talking $250MM. 


So what went wrong?  Nothing actually.  The problem was in the expectations where bad modeling likely drove unreasonable estimates.  Our guess is that these bullish analysts/investors simply projected the Q1 margin of 30.7% and assumed it would go higher based on the addition of Encore and its concentration of higher margin direct play.  Holding everything else constant, a higher mix of direct play should drive margins higher.  However, the mix change was only slight sequentially and mix change doesn’t occur in a vacuum.  The key here is that commissions, rebate rates, and promotional activity – all metrics that analysts will blame for the whisper miss – did not accelerate in Q2.  Wynn Macau actually beat our margin estimate driven by lower casino expenses. 


Here are some details to back up our contention that you can’t just stick in EBITDA margin on net revenues:

  • Based on our calculations, direct play only increased 100bps as a % of total RC over last quarter as junket growth was also strong.  For those analysts that actually take the time to model direct play they may have assumed it would be higher.  According to our database, direct RC did increase 15% sequentially compared to a 6.5% sequential increase in Junket RC at the property. 
  • We calculate the VIP rebate rate on was only 0.93%, thus Wynn does not appear to be buying this business.  As a result, the net VIP win was $1MM above our estimate.
  • While we won’t know the exact commission rate until Wynn Macau files, we estimate that the commission rate was about 40%.  Many analysts/investors will blame whisper miss on higher commissions but this does not appear to be the case.  Higher hold rates typically come with higher rebates and commissions – so despite having a slightly higher mix of direct play this quarter- those modeling high hold should have modeled a higher commission rate.  Last quarter’s commission rate was 39.1% - lower than normal for Wynn given the low hold in the quarter.  Wynn’s commission rate for 2009 was 42% as a point of reference.
  • Slot handle growth of 43% YoY was a nice reversal of sluggish growth over the last year for Wynn but hold % was low – 4.5% (which is not unusual given the high limit additions which typically have higher payouts) – this also negatively affected the sequential margin


Other Details:

  • Wynn Macau’s $714.4MM of revenues was actually $5MM below our number but lower casino expenses more than made up the difference
  • Most of the revenue difference was due to lower room occupancy, which was offset by lower promotional spending
  • VIP gross win of $709MM was $10MM below our estimate, RC was $800MM below our estimate, while hold percentage was 7 bps above our 3.15% estimate
  • High hold on VIP play, which we knew about and analysts should’ve known about, boosted revenues by $80MM and EBITDA by $15MM
  • High hold on Mass boosted revenues by $5MM and EBITDA by $3MM.  Mass drop only grew by 14% which was a little disappointing
  • Implied fixed costs increased from $79.0MM to $84.5MM

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