WMT's Bentonville Pilgramage

Note:  This post was originally published on 10/2. We are re-publishing in advance of this week's WMT analyst event taking place 10/12-10/13.


Wal-Mart’s analyst day is likely to yield less information about merchandising strategy and vendor pricing than in years past – at the precise time it’s needed most.  Furthermore, a smaller format urban location is likely to be more of a test than anything else- at least for now. There are simply too many new executives in new roles to have made any tangible progress in the effort to reverse the negative same store sales trend. 



Wal-Mart is set to host its 17th annual investor/analyst meeting in Bentonville on October 12th and 13th and this year is no different than year’s past. There’s much speculation brewing about what the world’s largest retailer is going to say and reveal.  This year’s topic du jour likely centers around two main areas, domestic store growth in the form a smaller, urban concept and a revamped merchandising strategy.  The former speculation arises out of ominous comments made from newly appointed Wal-Mart U.S CEO Bill Simon at a recent investor conference. 


Recall that Simon was quoted as saying, “We have lots of learnings around the world from Wal-Mart in small formats. Our group in Mexico and Central America, Latin America operates small formats very well and very profitably, and we are going to beg, borrow, steal and learn from them as quickly as we can, because it is important for our urban strategy.”   This in turn has led the media and some on the Street to expect a multi-hundred unit rollout of some convenience/grocery/dollar store hybrid in urban centers across the country.  We do not believe this will be the case.  While it possible that some new, smaller format (i.e 20k feet or less) will be announced, we believe it will only be in the context of a test or prototype.  History reminds us that both the Supercenter and Neighborhood Market were tested for several years before Wal-Mart made a full commitment to the format.  In fact, the Neighborhood Market is still more of a test than a viable growth contributor for the company.  We believe it is overly optimistic to expect an acceleration in U.S square footage growth in the near-term driven by a new and yet unnamed small store format.


Secondly on the topic of merchandising.  There is no question that Wal-Mart’s negative same store sales are in some part suffering from its unsuccessful efforts to drive purchases of non-consumable goods.  The leadership at the company has been in flux since June and has still yet to settle into their new roles.  Just this week alone, a CFO transition was announced, replacing a 10 year veteran with an internal promotion.  The names and faces of the executives coming and going is largely irrelevant in the near-term.  It’s not who is moving up and who is moving out, but rather that the world’s largest retailer is seemingly scrambling to make leadership changes in an effort to reverse the negative trend.  Change can be good, but it can also be unsettling in the near-term.  We do not believe that WMT will show (or convince) the Street that its merchandising strategy is fully baked and working at its meeting in Arkansas.  There are simply too many new faces in new roles for one to put forth a credible and cohesive strategy on such short notice.  Furthermore, it is highly unlikely that the suppliers and manufacturers could even produce enough product to meet WMT’s demands in such a short time before the holiday shopping season approaches.  If there is one thing we know, retailers of all sizes do not use the November/December time frame for taking big risks or making big, unproven changes.  Therefore, we’d expect the meeting to be centered on the “long-term”. Changes made in the next six months will impact the subsequent year.  We anticipate that this will be a long, drawn out process and one that still remains unproven.


Take a look at the following major management changes that have taken place since June alone:


  • 9/29- CFO promotion announced.  Former CFO, Tom Schowe, leaving company after 10 years.
  • 9/3- U.S CEO Bill Simon announces Chief Merchant position will not be filled.  Instead the company will operate with four merchants reporting to Simon.  Each one is responsible for a particular category.
  • 7/3- Chief Merchant John Fleming resigns a few days after new U.S. leadership is announced.  Role initially filled by two merchants on an interim basis.  Eventually each of these merchants is named to the team of four that replace Fleming on a permanent basis.
  • 6/29- Bill Simon, former COO of U.S, named to U.S. CEO role.  Replaces Eduardo Castro Wright who remains Vice Chairman and becomes head of and supply chain.  Castro Wright relocates to California.  COO role remains vacant.
  • 6/9- EVP/Corporate Secretary retires.  Position is filled by General Counsel, who assumes the additional role.   Ethics and global security responsibilities attached to Secretary role are reassigned within the organization.


The chronology above does not even scratch the surface of all the tertiary role changes within the U.S organization.  The bottom line here is that change is surely underway led primarily by people in new roles and an underlying approach which leaves nothing sacred.  For those expecting any major changes in top or bottom line results in the near to intermediate term, we caution that this is highly unlikely.  There simply has not been enough time yet for which the new team could have crafted and executed a revised merchandising strategy.  At best we believe this is 6 months out – but even then we need flawless execution.  So the many people that will attend the meeting looking for derivative plays out of suppliers will be also be disappointed. The same goes for insight on Wal Mart’s stance on passing through raw materials costs to customers and vendors. Expect less information than in the past (at the precise time when it is needed most). In the near-term those expecting some major announcements out of the investment meeting are also likely to be disappointed.  The strategy is still not defined, nor are the architects fully in place.


Eric Levine



We've seen this before (1970's).  The current administration is running out of time.


Health insurance premiums are rising, poverty is up, and the nation's unemployment rate is nearly 10% and now the government is expected to announce this week that more than 58 million Social Security recipients will go through another year without an increase in their monthly social security benefits.


Just one more check mark in the notebook to support a significant deceleration in consumer spending over the next three to six months.  Not to mention the political back lash from this move.


As a point of reference, social security and Supplemental Security Income benefits are adjusted annually to reflect the increase in inflation; the average CPI-W for the third calendar quarter of the prior year is compared to the average CPI-W for the third calendar quarter of the current year and the resulting percentage increase represents the percentage that will be used to adjust Social Security benefits beginning for December of the current year.


The projection will be made official on Friday, when the Bureau of Labor Statistics releases inflation estimates for September. Those on social security haven’t had a raise since January 2009, and now it looks like they won’t be getting one until at least January 2012.


While the government may not see inflation, the average American is experiencing inflation.  Just look at the chart below for a broad measure of inflation -  the CRB Foodstuffs Index. 


The economy is also running out of time as it relates the waning impact of stimulus on the economy; the stimulus life lines that have supported consumer spending for the past 24 months are coming to an end.

  • Health care: The Recovery Act set aside $87 billion to assist states covering their soaring Medicaid costs.
  • Tax credits: The Recovery Act boosted the Earned Income Tax Credit and Child Tax Credit, as well as put more money in the pockets of low-income workers with the Making Work Pay credit of $400 a person. These tax benefits end this year.
  • Needy children: The stimulus program also gave $2 billion for child care subsidies and another $2.1 billion for Head Start, an early learning program for needy children, both of which end after September 30.  
  • Homeless: The act provided $1.5 billion over three years to prevent homelessness and find places to live for those without a roof over their heads. It increased the maximum food stamps benefit by more than 13% for several years and also sent $150 million to the states for emergency food assistance in 2009.
  • Unemployed: The Recovery Act pushed back the deadline to apply for extended unemployment insurance, which is now set to run out at the end of November.  Jobless benefits alone are credited with keeping 3.3 million people out of poverty last year, according to the Center on Budget and Policy Priorities.

Howard Penney

Managing Director


TIME IS RUNNING OUT - crb foodstuffs



A surprisingly strong month with mostly hold driven market share moves.



For what's supposed to be a seasonally slow month, September came in quite strong with total gaming revenues growing 39% to $1.9BN - just below August's numbers.  MGM stole the show in September growing 83% YoY. This shouldn't be a surprise given MGM's pending IPO, new property management and aggressive credit extensions. MPEL enjoyed its second month in the top 3. Wynn lost the most share in September due to a combination of factors - including difficult hold comparisons and low hold.


That being said, September is history as all eyes are now on October's record pace to break HK$20BN.  Below is the detail for September.



YoY Table Revenue Observations


LVS table revenues increased 35% with growth coming from a 42% increase in VIP revenues and a 23% increase in Mass revenues.

  • Sands grew 3%
    • VIP revenues declined 2% despite only a 1% decline in Junket RC volume
    • 13% increase in Mass revenues
  • Venetian was up 43%
    • VIP revenues increased 54%
    • Mass revenues increased 29%
    • Junket RC increased 15% YoY.  Assuming 22% direct VIP play volume, we estimate that hold for September was 2.6%.  However, last September, assuming 17% direct play, the hold percentage was even worse at 2.0%.
  • Four Seasons was up 130%
    • Mass revenues grew 28%
    • VIP revenues increases 158%, in-line with growth in Junket VIP RC volumes
    • If we assume over 50% VIP turnover came from direct play, hold was 3%, compared to estimated hold of 2.3% in September 2009.

Wynn Macau/Encore table revenues were up 21%, driven by a 16% increase in VIP revenues and a 44% increase in Mass revenues

  • Junket RC volume increased 43% compared to a market increase of 42%, so it does appear that if not for hold issues, Wynn would have held their own
  • Assuming direct play volumes at Wynn were roughly 12%,  Wynn's hold was 2.6% in September compared to 3.1% hold assuming the same direct play volume ratio in September 2009.

MPEL table revenues grew 29% with the growth fueled by 98% growth in Mass and 21% growth in VIP

  • Altira was up 19%, due to a 15% increase in VIP revenues and a 105% increase in Mass
    • VIP revenue growth was entirely due to favorable YoY hold comparisons.  VIP RC was down 16% YoY. 
    • We estimate that hold in September was 3.5% vs. 2.5% in September 2009
  • CoD table revenue increased 35% YoY, driven by 97% growth in Mass and 26% growth in VIP revenues
    • Mass revenues were $36MM
    • Junket VIP RC increased 41%
    • CoD played lucky in September, but they also played lucky last year.  If we assume 18% direct play at CoD, hold was 3.2% in September vs. an estimated hold of 3.6% last year.

SJM table revenues grew 37%

  • Mass was up 31% and VIP was up 40%
  • Junket RC volumes increased 71%
  • SJM's hold was only 2.7%, compared to a very low hold 3.3% in September 2009.  October will have an easy hold comparison since last October's hold rate was only 2.55%.

Galaxy table revenue was up 59%, driven by a 68% increase in VIP win and a 7% increase in Mass

  • Starworld's table revenue soared 103%, driven by 112% growth in VIP revenues and 30% growth in Mass
  • The Group RC volumes were up 30% while Starworld RC volumes increased 39%.  VIP revenues for the Group and Starworld benefited from strong hold.  September hold for the Group and Starworld was 3.2% and 3.46%, respectively, compared to low holds of 2.5% and 2.3% last year.  October 2009 hold rates were normal.

Not surprisingly, MGM reported the strongest growth in the month of September, with growth of 86%

  • Mass revenue growth was 56%, while VIP revenues grew 97%
  • VIP RC grew 85%
  • Hold appears to have been normal in September at roughly 2.9%


Table Market Share


LVS table share dropped 20bps sequentially to 19.1%

  • LVS's share of VIP revenues increased 20 bps in October, along with a 20 bps increase in LVS's share of Junket RC
  • Mass share increased by 100 bps to 26.3%
  • Sands market share increased by 35bps off of a 63bps increase in VIP share
  • Venetian lost 209bps to 9.5% sequentially, their lowest share in 12 months
    • Venetian's share loss was mostly driven by a 210bps decrease in VIP, while Mass share lost 53bps.
  • FS share gained 150bps of share to 3.4% due to a 218bps increase in VIP share

WYNN's table share decreased to 12.0%, its lowest share in 10 months; it was also below the TTM average pre-Encore opening market share of 13.8%.

  • Mass market increased 115bps to 10.2%
  • VIP revenue share decreased 2.9% to 12.6% sequentially. Part of the decrease was attributed to low hold, as Wynn's VIP RC share only decreased 90bps to 13.9%
  • Wynn's VIP share fell to 5th place behind SJM, MPEL, LVS and Galaxy

Crown's market share was flat sequentially at 16.3% in September

  • Both CoD's and Altira's share were also flat sequentially at 10.7% and 5.6%, respectively

SJM's share increased by 125bps to 31%

  • SJM's share gain was entirely driven by a 220bps of share in VIP to 28%
  • Mass share dropped 100bps to 40.2% sequentially

Galaxy's share slipped 1% to 12.1%, driven by a 150bps decrease in VIP share

  • Starworld's market share decreased 39bps sequentially to 10.5%, due to a 64bps decrease in VIP share
  • Junket RC share decreased 100bps to 12% for Starworld and decreased 80bps for the Group

MGM's share increased by 192bps to 9.6% - MGM's best share month since August 2009

  • MGM's share gain can be attributed to a 63bps increase in Mass and a 235bps increase in VIP share
  • RC share increased 95bps


September Slot Revenue Observations

Slot revenue grew 33% YoY in September reaching $94MM, the second best month in slots following August 2010

  • Wynn experienced the largest growth of 60% to $18MM
  • SJM, MPEL and Galaxy's slot revenue all grew around 55% YoY
  • MGM's slot revenue increased 38% to $11MM
  • LVS having the largest base also had the slowest slot growth of 33%, which is nothing to complain about






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Bear/Bull Battle: SP500 Levels, Refreshed...

POSITION: SP500 (SPY) no position; long Volatility (VXX)


It’s quiet out there today so all of the price, volume, and volatility scores in my model mean less than they would on an ordinary Monday. That said, market prices don’t lie; people do – and the risk in analyzing today is prefacing all analysis with my own yeah buts.


For the last few weeks, I’ve been looking for 2 explicit price levels in the SP500 and VIX, respectively, to signal that we are entering the danger zone of heightened probability of an immediate term crash. That’s not to say a crash is likely. It’s simply to say that it’s likelier than it was last Monday.


Those 2 risk management levels are: 

  1. SP500 > 1164
  2. VIX at/below 20 

As of 1PM EST today, the VIX is trading below 20 and the SP500 is testing 1167 on the upside. While the most anti-climactic of all scenarios would be if today was the lower-high for the SP500 (versus it’s April high – see chart), I don’t foresee that being the case. I’m registering 1174 now in terms of immediate term TRADE upside, and as hard as it is to wait and watch, that’s what I am going to do.  Shorting the SP500 in the face of QE and M&A requires patience.




Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed...  - S P

Sell-Side Risk Management: "Rooting For Massive Upside"

“Good Morning – Bond market is closed today.    Third quarter reporting picks up this week with tech and financials heavy on the schedule.  Last week’s rally was a fear of the QE3.  This week we will need some earnings, and guidance to keep the upside momentum rolling.  Our Guy Bianco expects a strong 3Q earning season, and he has been a monster bull.    1164 was Fridays high, and the months high.   Plenty of room till we get to 1175.     Sorry nothing earth shattering here.    I am rooting for massive upside surprises out of Fins, we’d all be happy.”

-BofAMLCO trader note


Keith R. McCullough
Chief Executive Officer


Sell-Side Risk Management: "Rooting For Massive Upside" - 1


While last week was a great week for restaurant stocks, the looming cloud of food costs must be accounted for.


Quick service and casual dining stocks climbed 2.5% and 3.4%, respectively, over the week ended Friday.  Important news items going into this week include:

  • McDonald’s is bringing back the McRib on November 2nd for six weeks.  This is in line with MCD’s continuing approach of taking on competitors head on.  Its recent release of the burrito-sized Chicken Snack Wrap was clearly aimed at the Chipotle customer. Burger King has seen recent success with its “Fire-Grilled Ribs” and MCD will look to gain a share of that success with the McRib release.
  • Dine Equity signed a new $950 million senior secured credit agreement. 
  • Brinker International’s stock could climb about 25% in the next year, according to Barron’s article published this past weekend.
  • Surging corn and meat prices are driving costs higher for U.S. retailers.  The U.S. cattle herd in July was the smallest since 1973.  Beef is more costly at current prices than it has been in 25 years. 

TALES OF THE TAPE - stocks 1011




Howard Penney

Managing Director

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