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A 50% move in the stock and this is all we get?  Macau is finally delivering and the Borgata multiple was nice but where is the evidence of a big Las Vegas recovery? Certainly not in CityCenter.



Our big picture thoughts haven’t changed much since our post last night, “MGM: SO IT WAS A DEAL ROADSHOW”.  However, we wanted to add some additional observations and details.  Given the run in the stock, the looming cash flow issues in 2011, and the negotiations to restructure their City Center debt, management was smart to strike while the iron was hot with an equity deal.


Vegas was only in line with expectations.  Where was the blowout anticipated after the August Strip revenues were released?  EBITDA was a little better but so was hold percentage.  Reported Strip baccarat volumes were up 39.6% and 87.2% in July and August, respectively, yet MGM’s wholly owned Bacc volume declined 6% in Q3.  We were hoping for more from a company that boasts to own 35-40% of the baccarat volume on the Strip.  With Aria they say it’s over 50%.  Who’s hiding the bacon or was September a complete disaster on the Strip?


The most interesting aspect of Q3 was the diverging fortunes of MGM’s newest assets:  MGM Macau and City Center i.e. The pretty sister and the big ugly duckling.

  • So let’s start with the pretty girl (we’ll call her Anna)
    • $83MM in EBITDA is pretty good, despite a low hold; 4Q should be even better.
    • 3Q detail: Slot win was $33MM; RC volume of $13BN with low hold of 2.6% (we assume 15% direct play); Mass table win of $113MM
    • MGM is already tracking ahead in market share for October at 9.8% for the first 10 days. So we think that if the market holds up and MGM’s hold is normal, a $100MM quarter is within reach.
    • We now believe that MGM should be able to sell the deal on about $350MM of EBITDA, which means that at 11x they can net $450MM on a 30% IPO
  • Thoughts on the ugly duckling (let’s call him Todd)
    • Is there really anything good to say about the 3rd quarter, where a $9BN property makes no money?  If there is, I’m sure Jim will say it on the next call.
    • When we stifle out the noise, CityCenter reported a marvelous result of $0 EBITDA for the quarter… here’s how we get there
      • Reported Adjusted EBITDA was $52.4MM
      • Subtract $28MM of forfeiture profits = $24MM
      • Add back $2MM of losses on condo sales ($26MM of residential EBITDA pre development & admin less the forfeitures) = $26MM
      • Less the $26MM of positive hold impact = $0MM
    • Another way to think about City Center (ex residential) is that Aria is on a run rate of $15MM/quarter… let’s say things improve a lot.. .and they get to $30MM.  Everything else is a small bleeder or small contributor but basically inconsequential unless things just really get a lot better to the tune of $50-$100 of incremental RevPAR.  Forfeitures should wind down over the next quarter or 2 so then we are left with the residential sales – which basically make no money and at best proceeds can repay the extra money that MGM is on the hook for.
    • MGM’s net obligation in City Center was $137MM last quarter – and has now increased by $232MM to $369MM per the release
    • City Center lenders can’t be too happy right now.  There must be real doubt whether this project can produce $150MM of EBITDA much less meet the 5.5x leverage covenant that comes into play in June 2010. We believe that MGM will have to make a decent pay down of the CityCenter facility as part of its debt restructuring. 

Toning Footwear - A Year Later, What's Next?


It's been a year since we began to see toning sales ramp from its infancy and less than 1% of the US athletic footwear market to a significant category accounting for ~7% of the industry. So where does this leave the category in terms of its size and growth outlook? Additionally, share loss at the industry leader (SKX) implies the domestic category will have to grow by 50%-75% for SKX EBIT not to contract next year. Such growth is doubtful. Adi’s outlook on the other hand is positive. Let's take a walk…



Sizing up the Market:

By our estimates, toning is a $1.2Bn category accounting for ~7% of the athletic footwear market. In the process of sizing the market, we took a detailed look into NPD Group's reported sales in the toning category YTD. Then based on the recent deceleration in the category over the last few months, we are assuming that toning stabilizes at roughly 7% of the athletic footwear, or even less as new product flows through reaccelerating the overall industry.


While NPD captures a broad sample of retailers throughout department store and national chains, shoe chains and athletic specialty/sporting goods channels, this sample captures most, but not all sales. As such, we estimate is captures roughly 70% of toning sales. Therefore, assuming ~$695mm in estimated sales in 2010 accounts for only ~70% of sales through those channels, we get to $1Bn on the year. In addition, NPD's sample does not account for owned retail such as Skechers, Payless, or New Balance stores for which we've added another $160mm to arrive at our ~$1.2Bn sales estimate for 2010 – on the low end of the $1.2-$1.5bn range commonly referenced in the trade. 


To get to $1.5bn, we’d need to assume a straight-line approach to the category’s trajectory through the summer months towards a 10% share of the industry assuming 5%+ growth through year-end. At this point, the ramp needed to achieve the incremental sales are clearly unlikely.  


Toning Footwear - A Year Later, What's Next? - ToningMktSize 10 2010


Notice the stability in sales of core athletic footwear both before and after the introduction of the toning. This suggests the category is indeed incremental and not cannibalizing other categories. This is true with the exception of the broad and generalized athletic casualty category, which has lost some of its share.


Toning Footwear - A Year Later, What's Next? - ToningMkt and Core Dollars Size 10 2010



Share within Athletic Footwear:

The deceleration in toning sales relative to the industry in August has been cause for concern as the category is just now facing tough comps. We suspect this is primarily due to the timing of BTS shopping when parents (i.e. Mom's) are more focused on outfitting their kids than themselves.


Toning Footwear - A Year Later, What's Next? - Toning Percent of Total 10 2010



Brand Proliferation (2009 - Present - Future):

This chart says it all. After highly successful pilot tests by Skechers and Reebok early in 2009, several companies noting the trend began the 9-month process to engineer, design, produce, and then ultimately ship goods to the U.S. for sale in the late fall/spring of 2009/2010. While others were ramping up their supply chains, Skechers enjoyed a decided first mover advantage for the majority of 2009.


Clearly, the competitive landscape has ramped substantially over the last 12-months – see the chart below. In addition to the newest entrant – Fila, both Puma and Crocs have also recently announced plans to enter the category.


Toning Footwear - A Year Later, What's Next? - Toning Brand SKU Count 10 2010


Market Share within Toning:

While Skechers dominated toning for much of 2009 with 90%+ share of the category, Reebok hit the ground running in the fall quickly capturing a sizeable share of the market. Ever since, the two have been trading share with significant variability; however the trends reflect lower highs and lower lows for Skechers while Reebok is the exact opposite. Additionally, several smaller brands are on their way to establishing 5%+ share. We’d also note that Skechers’ share is likely overstated while Reebok is probably understated by +/- 5%. As competition heightens, we expect Skechers to account for roughly 45% of the category in 2011 relative to ~60% in 2010. Based on Reebok’s upward trajectory, category extensions, and its increased commitment to spending more on the brand through the 2H than it did in the 1H, we expect the brand to account for more than 30% of the market in 2011 compared to 28% in 2010.


Toning Footwear - A Year Later, What's Next? - Toning Brand Mkt Shr S R 10 2010


Skecher's and Reebok's sales as a percent of total brand sales in these channels now represent 43% and 37%  for each brand respectively. It's important to note that this category accounts for less than 5% of total sales at companies like Adidas (Reebok), PSS (Champion) and New Balance though at Skechers it’s closer to 25% making it far more susceptible to potential trend deterioration. We’d also note that even the brands where it’s seemingly less relevant, this has been a hot category with A) little advertising requirements relative to sales, and B) hungry retailers looking to diversify away from Skechers.


Toning Footwear - A Year Later, What's Next? - Toning Brand Mkt Shr 10 2010


Sales by Channel:

Distribution has evolved in the category as the brands have. While the percent of sales sold through athletic specialty channel is largely unchanged, considerably more product has been sold through department and national chain stores with increasingly more value priced product now in the market – a trend we expect to continue, and most notably…a trend consistent with a new product/technology moving towards a much more competitive part of the maturation curve.


Toning Footwear - A Year Later, What's Next? - Toning Chan Dist 10 2010


Enter the Ladies:

Arguably the most significant impact of the toning craze has been its impact on the female consumer giving women a reason to shop in the athletic channel and providing retailers with an invaluable opportunity to gain share of wallet. With a 2%+ share gain over the past year in the female demographic, spend on toning product has been almost entirely incremental to the industry. This bodes well for future demand as lower price points continue to draw more and more women into the channel.


Toning Footwear - A Year Later, What's Next? - Toning AthlFW Mkt Shr Gender 10 2010


What’s in Store for 2011?  

For starters, this category has achieved a 7%+ share of the industry, but not until this past summer. With additional SKUs and extensions still coming out, we expect toning to hold at least a 6.5% share of the industry through 2011, which equates to 15% growth in category alone. Additionally, Skechers' success with the introduction of its new Resistance Runner in May has doubled its men's business – a demographic that has been slow to develop. Assuming men's continues to account for ~20% of sales next year, that would add another 5% to category sales next year. While this may sound bullish for Skechers, the math requires 50%-75% growth in year 2 for Skechers just to maintain EBIT dollars associated with the toning category. Take a look at the table below.


In looking at Skechers’ share of the industry in 2010 and gradual deterioration thereof, we assume the brand will account for ~45% of the domestic market in 2011 compared to ~60% in 2010. With price deterioration, cost inflation, and margin degradation, we estimate that incremental  Shape-up margins will come in closer to 20% in 2011 from 25%-30% EBIT in 2010. The combination of share loss and compressed incremental margin is likely to reduce 2011 EBIT dollars by $40-$75mm. That’s on an base of what we estimate to be ~$170-$200mm of Shape-Ups related EBIT in 2010.  In order to simply keep EBIT dollars flat, we’d have to assume that either: 1) Skechers maintains 60% share of the category, or 2) the domestic toning industry would have to grow 50%-75% in 2011 to $1.7-$2.0Bn. For many reasons, this simply will not happen. This has yet to be reflected in consensus estimates assuming mid-to-high single digit EBIT and earning declines in 2011 – we’re shaking out down 30%.


Reebok’s outlook is more positive with share gains likely to offset declines from margin degradation.  Assuming a similar margin impact, revenue growth of 25%-to-30% in 2011 could net out a few cents to the positive. The bigger opportunity for the brand exists internationally where we believe it has dominant competitive position. To the extent the brand can maintain its profitability level, Reebok’s Easy Tone’s could drive $0.10-$0.15 of incremental EPS in 2011. Not exactly earth shattering, but in light of the industry bellwether’s prospect considerably more positive.


Lastly, another important observation is that unit sales in the industry have been substantially higher over the last few years suggesting the capacity for additional unit demand even in the face of retracted consumer spending is possible and would still be below recent peak levels. This is not in our estimate for category growth next year. All in we're expecting the category to grow ~25% next year domestically to $1.4Bn.


Toning Footwear - A Year Later, What's Next? - Toning SKX Impact 10 10


Toning Footwear - A Year Later, What's Next? - Toning Mkt Shr Gender 10 2010


Toning Footwear - A Year Later, What's Next? - ToningMkt and Core Unit Size 10 2010


Casey Flavin



Some sort of equity deal was inevitable.  Now that everything is on the table, was it worth a 50% move in the stock in the past month and a half?



The Good:

  • Wholly owned property EBITDA was about $21 million higher than we had projected, but likely in-line with the recently elevated whisper numbers.
  • Aria pulled in $41 million in EBITDA, $10 million higher than we thought.
  • MGM secured a bid for Borgata at about 7.25x our 2011 estimate which looks like a very good price for MGM
  • MGM will get paid the $125 million receivable out of MGM Macau in October and not have to wait for the IPO
  • MGM Macau EBITDA was $83MM in the quarter and we think hold was actually low. 4Q promises to be another strong quarter – which is all good for selling the IPO and yielding net proceeds to MGM at the high end of their expected range.  We will have a follow up note with more details.
  • Raising equity will improve liquidity
  • Jim Murren will get paid another big bonus for raising all this cash

The Bad:

  • Hold percentage was higher than midpoint of normal hold
  • Aria hold percentage was very high.  Normalized EBITDA would’ve been $26 million lower, missing our estimate by $16 million.
  • Kirk Kerkorian thinks the price is right to take a lot off the table.  He may be old but he isn’t stupid
  • Shareholder dilution

The Ugly:

  • Strip Baccarat volume grew 39.6% and 87.2% in July and August, respectively and MGM posts a decline in Baccarat volume (not including Aria) of 6%?  September must’ve been a disaster.  Remember that MGM ripped up 15% the day the August Nevada numbers came out.
  • After seeing these numbers, I’m not so sure that Las Vegas has really improved that much.  What’s the next catalyst?
  • MGM trades at 13x our 2011 EBITDA estimate.  With the cat out of the bag, I’m hard pressed to find a reason to buy this stock here.
  • The company will pay Jim Murren another big bonus for raising all this cash

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Inflation Wars: Snorting QE

This note was originally published at 8am this morning, October 12, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"I didn't even like coke that much, it was just a case of getting on whatever train I needed to take to get high.”

-Carrie Fisher


On many levels, the Big Government American Life of the late 1970s became a scary place. As consensus gets paid to snort QE and blow its mind on whatever M&A machination they can dream up because “money is cheap”, please remember that we’ve seen government sponsored trailers to this movie before.


In 1977, as Jimmy Carter was being sworn in as President of The United States and the Fed’s Chairman, Arthur Burns, was finishing his experiment of monetizing US Treasury debt, “Star Wars Episode IV: A New Hope” came to the big screen. In the meantime, Princess Leia (Carrie Fisher) was snorting lines of cocaine on the set of “The Empire Strikes Back.”  


If you didn’t know that’s what was going on behind the scenes, now you know. Yesterday, in the spirit of Columbus Day, the now 53-year old Fisher admitted that she didn’t even really like doing coke, but she was quite happy to get high anyway.


Hope, of course, is not an investment process and neither is chasing this market higher in the face of what you really know is going on. Inflation is running up again. Both companies and consumers alike are starting to get squeezed.


Before you have a “New Keynesian” who got submarined by stagflation circa 1981 send me a reply explaining how everything is “deflationary”…  but earnings for the companies my buddies and I are long are “going to be great”…  but “we need QE3 anyway”… let’s look at some real-time prices:

  1. CRB Commodities Index hit a new YTD high yesterday for 2010 (up +13% since August!).
  2. Copper prices are up +28% since August and are now testing their all-time peak prices of 2008.
  3. Chinese stocks have rallied +20% since their July lows.

China, Copper, and Commodities? Yes, Dear Congress person, these are what we call demand drivers of long term secular inflation that are augmenting your Burning of the Buck as you provide the stimulus for Jobless American Stagflation.


Now please don’t take my word for this concept of long-term secular inflation. Have all of your analysts read pages 180-201 in Reinhart & Rogoff’s ‘This Time Is Different.’ Chapter 12, “Inflation and Modern Currency Crashes”, is very timely reading when you consider the history of global inflation going back to the year 1500.


Yes, going back that far in time is a long time. But so is life and, as Rose Bertin aptly put it, “there is nothing new except what is forgotten.” The chart on page 181 of the median inflation rate, using a 5-year moving average, tells you all you need to know. Ever since the world convinced itself that the US should be trusted to debauch the world’s reserve currency, prices have gone up.


In today’s world inflation is, like politics, a local phenomenon that’s backed by the credibility of the government who oversees its currency. So let’s strap the accountability pants on and snort down some local inflation readings from this morning:

  1. UK Consumer Price Inflation (CPI) was reported at +3.1% year-over-year (+110bps above what even the government calls acceptable).
  2. Brazil is raising its inflation forecast for 2011 to +4.98% - that’s pretty precise because they change the estimate as prices change.
  3. Korea’s Posco (the 3rd largest steelmaker in the world) cuts earnings guidance by 7% due to “commodity costs” rising.

All the while, back here in the Empire of the Fiats, after the US Dollar has lost -13% of its value over the course of the last 19 weeks, Ben Bernanke is going to fear-monger you into trusting that everything you put in your car or grocery basket is deflating. Keep snorting on that QE idea dude. Arthur Burns did.


Ahead of Heli-Ben’s deflation speech at the Boston Fed on Friday, think about what’s really going on behind the scenes here folks. The US government is broke and can’t afford to tell Americans on Social Security that professional politicians would rather pay themselves than the political piper.


As my partner, Howard Penney wrote yesterday, health insurance premiums are rising, poverty is up (43 million on food stamps), 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.


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.


Now you know why Bernanke’s speech in Boston is titled “Revisiting Monetary Policy In A LOW INFLATION Environment”…

Keep taking whatever train you boys at the Fed need to get on to help CNBC cheer that stock market higher. We know what’s going on behind the scenes.


My immediate term support and resistance lines for the SP500 are now 1153 and 1173, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Inflation Wars: Snorting QE - fisher

JCP: Orange Jump Suit Risk?

Who knew what, when?


JCP: Orange Jump Suit Risk? - Chart1

The NFL Calendar is Re-Written

The old adage in NFL product licensing is that “Reebok owns Sunday (pro), Nike owns Saturday (college), and Under Armour owns Friday (high school).”  Well, get ready to rewrite the calendar. Reebok’s 10-year deal with the NFL expires in 2012, and the lion’s share is ending up in Nike’s hands. Nike is a winner here. But let’s face it…these deals are getting expensive. The biggest winners might very well be the retailers.


A few thoughts…


1)      Nike will absolutely blanket both the collegiate circuit as well as the NFL.


2)      A decade ago, this deal did not make sense for Nike (it was just emerging from a VERY ugly period when the contract -- which it owned -- came due). Today, it makes all the sense in the world. This synchs perfectly with the company’s focus to go deep into specific categories – US Football being one of them.


3)      It’s not on the cheap. We’re still waiting on numbers, but it’s safe to say that it will be well above the $30mm/year paid by Reebok. This deal will also have some up front payment that is likely to flow through the P&L. The interesting point here, however, is that even if it were $60 per year, we’re only talking 2% of Nike’s Demand Creation budget. If there was never a single dollar of sales associated with this deal, it would only hurt margins by 30bps.  Clearly, that’s not the plan…but it shows the size and scale Nike has vs. its’ competition.


4)      Let’s give credit where it’s due to AdiBok for not chasing this puppy. But what does it do now? The $300mm was an extremely poor investment for Reebok – one of the worst in recent memory for any company in this space. But Adidas now has a powerful $30mm/year weapon on its P&L. Will it use it in another sport in the US? Will it go after specific athletes? Our bet is that it will up the ante for European Football. Nike will not have the luxury of ignoring this.


5)      Under Armour is more likely to get Tom Brady (see our 10/7 post – Tom Brady – Free Agent). That would be somewhat of a loss for Nike – even though he has not had great commercial value. The traditional Nike mindset would be to keep him anyway (they'd let pride get in the way). If they let him go, it will impress me as it relates to Nike letting its ego go and focusing on the highest ROI uses of capital. That said, while cutting Brady loose might make sense on paper, what happens if UA steals market share because they use him more effectively? Decisions, decisions... I just argued both sides in a simple paragraph. Can you imagine what the debate is like internally?


6)      Foot Locker is likely to benefit as well. Note that Nike has co-branded NBA shops with FL. FL would love NFL shops, but AdiBok wasn’t exactly the best partner. That will change.