The Week Ahead

The Economic Data calendar for the week of the 18th of October through the 22nd is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c2


Unlike most quarters, the news here is that we are not far off from consensus:  7% above on Macau EBITDA and 1% higher on Vegas.



Wynn’s Q3 shouldn’t be the huge beat we’ve seen in recent quarters.  Market share losses in Macau should prevent outsized outperformance but the quarter should still be solid.  We think Wynn’s market share remains disappointing post the Encore opening but strong Macau market growth makes the market share argument fairly weak, until it’s not.  Here are the details in our model:



3Q2010 Detail:


We project Wynn Macau & Encore to report $205MM of EBITDA on net revenues of $686MM

  • Net casino revenue of $640MM
    • RC volume of $21BN at a hold of 2.9%, producing gross VIP table revenue of $623MM
    • We assume a 84bps rebate rate and a 40.6% revenue share commission rate
    • Mass table win of $138MM and slot win of $60MM
  • $46MM of non-gaming revenues net of comps
  • $366MM of variable expenses comprised of taxes, gaming premium, junket commissions in excess of rebates, and bad debt
  • $21MM of recorded non-gaming expenses
  • $95MM of fixed expenses

We expect Wynn Las Vegas & Encore to report $65MM of EBITDA on net revenues of $327MM

  • Net casino revenue of $134MM and expenses of $70MM (up 3% YoY and $1MM QoQ)
    • Table drop of $579MM and hold of 19% for total table win of $108MM
    • Slot win of $765MM and revenues of $46MM
    • Discounts of 13% or $20MM
  • $77MM of room revenue and expenses of $30MM
    • 90% occupancy and ADR of $195
  • $107MM of F&B and $54MM of entertainment, retail and other revenue
  • $44MM of promotional expenses
  • $61MM of SG&A

Other stuff:

  • D&A:  $105MM
  • Net interest expense:  $54MM
  • MI:  $34MM

R3: Mango, Mobile, NFL, and H&M


October 15, 2010


 With Wal-Mart now clued in to mobile commerce, dare we say it is on the cusp of becoming mainstream?  If Japan is any indication, then this could be a big retail opportunity. 





- CNN named Nordstrom one of the top 100 best companies to work for.  This clearly comes as no surprise, as the overall happiness of its employees shines through to its differentiated customer service model.  In fact, we believe this unique service proposition is part of driving force behind JWN’s outperformance over the past year.  Recall that JWN has not had layoffs over the same time frame.


- Keep an eye on the trend of mixing old and new.  Recently launched UK ecommerce site,, mixes vintage clothing and accessories with more contemporary (new) merchandise.  Given that fashion repeats itself, the opportunity to present “originals” next to modern interpretations makes for an interesting and creative offering.  Recall that American Apparel as well as Urban Outfitters have previously dabbled in vintage.


- In a unique marketing effort, Tommy Hilfiger has launched an online digital radio station.  The broadcast is available 24/7 and is called LOUD radio.  The station was created to promote the launch of a new fragrance also called LOUD which launches in the Spring.  The station is available online as well as over the air waves in 18 countries and 9 languages. 





Leather Sector Strength - Total manufacturing output in the Philippines increased in July compared with the same month last year, with leather and leather gods leading the way, according to the national statistics office. Manufacturing growth was at double-digit rates for the seventh consecutive month. Keather and leathergoods saw strong growth of output at 47% compared with 34.4% in June. Four manufacturing sectors experienced negative growth, including footwear and apparel (-19.9%). <>

Hedgeye Retail’s Take: Both a resurgence in accessories on the higher end along with China’s crackdown on unsafe tanneries are likely to be the driving factor behind this growth.  Additionally, we note that footwear remains one of the strongest categories in all of retail. 


Spanish fast fashion retailer Mango plans to open 220 stores in China next year to boost its sales threefold in the country within three years. Mango opened its first store in China in 2002 and built a distribution hub in Shanghai in 2006. It now owns 431 franchised stores in the world. The company purchases about 45% of goods from China. In addition, Mango started online sales last year and hopes to increase revenue from the channel to 7% of the total sales by 2013, sources reported. <>

Hedgeye Retail’s Take:  Recall that Mango management also recently stated that it expects to have a presence in every major city in the world.  Bold statement, but one that a privately held, family owned business can say without getting into too much trouble. 


Mobile Payment Adoption Rising - Consumers may be most likely to use their mobile phones to check store locations and pricing, but they’re showing an increasing interest in using their phones to make a purchase, says Hung LeHong, research vice president for retail at technology research and advisory firm Gartner Inc. LeHong, during a presentation at this week’s Mobile Commerce Forum in Chicago, noted that purchasing via mobile phones came in at the bottom of a list of things consumers said they were likely to do this fall and next spring with their mobile phones.The Gartner study found that 17% of U.S. consumers said they were likely to make a purchase from a mobile app or mobile commerce site, and that 16% said they were likely to make an in-store purchase through a mobile phone. These figures compared to 42% of consumers who said they were likely to use their mobile phone to check a store location, 34% who said they would check product prices while in a store, and 31% who said they’d receive promotional messages on their phones. But though the percentages were smallest for making purchases via mobile phones, those percentages showed the strongest growth over prior surveys, LeHong says. <internetretailer>

Hedgeye Retail’s Take:  While still in its infancy stateside, mobile commerce has grown into a big business in other countries like Japan.  Approximately $19 billion worth of goods are purchased from mobile devices in Japan.


Domestic Shipping Duopoly Accused of Price Fixing - DAFMS Logistics Management Group, a shipping consultant to retailers and other shippers, has filed a complaint in federal court charging United Parcel Service of America Inc. and FedEx Corp. of antitrust violations by refusing to work with AFMS and similar firms to revise rate contracts on behalf of shipping clients. AFMS, based in Portland, OR, charges that UPS and FedEx have “induced and persuaded” shippers not to deal with it, and that UPS and FedEx have threatened to raise the rates of any shipping clients who share their shipping data with outside consultants for the purpose of seeking re-negotiated rates from the two carriers. UPS will vigorously defend itself against the AFMS complaint, a spokeswoman says. “Our take is that the lawsuit is trying to require UPS to deal with its customers through an intermediary—and that only adds costs for our customers,” she says. <internetretailer>

Hedgeye Retail’s Take:  Whether this is true or not, battling with FedEx and UPS is probably not going to come easily or cheap.


NFL Scores Again Singing Supermodel Miller as New Spokesperson - Sports Illustrated swimsuit model Marisa Miller is teaming up with yet another legendary sports organization: the National Football League. The supermodel has signed on as the new spokesperson for the NFL's 2010-2011 season, The Hollywood Reporter confirms exclusively. "I'm so excited to have this incredible opportunity to partner with the NFL," Miller says. "I've grown up watching football my whole life." The "SuperFan" will be promoting the league's special events, including the Oct. 31 International Series game airing on CBS between the San Francisco 49ers and Denver Broncos in London. "Marisa's love for the NFL and our sport made her ideally suited for this role," said Chris Parsons, NFL Vice President of International. "We look forward to working with her." <BrandWeek>

Hedgeye Retail’s Take:  The opportunity to target female fans is a clear opportunity and focus for the NFL as the league has extended licenses to  retailers including Victoria’s Secret.  Look to see more of this as NKE takes over in 2012, especially on the sportswear side.


Luxury Spending in Hong Kong Robust - Chinese shoppers visited Hong Kong in record numbers last week to splurge on $130,000 watches, vintage wine and diamonds, boosting sales for Sotheby’s and retailers including Omega retailer Hengdeli Holdings Ltd.  Merchants’ sales gained as much as 30 percent from a year ago during China’s Golden Week holiday, according to the Hong Kong Retail Management Association. Sales jumped more than 60 percent in the Oct. 1-7 holiday, Hengdeli Board Secretary Tan Li said in an interview.  Swatch Group AG partner Hengdeli and Emperor Watch & Jewellery Ltd. are opening shops in Hong Kong as record tourist arrivals and a stronger yuan boosted sales for 12 straight months. Hong Kong, host of the second-most expensive retail rent district after New York’s Fifth Avenue, stands to benefit from China’s drive to boost domestic consumption as the nation’s households accumulate $16.5 trillion of assets. <Bloomberg>

Hedgeye Retail’s Take:  This comes as no surprise following the extremely positive results coming out of the casinos in Macau over the same holiday. 


H&M September SSS Positive - Hennes & Mauritz AB said same-store sales in September increased 8 percent, compared to 14 percent in August. Including new stores, total revenues for the month of September grew 16 percent, versus 24 percent in the previous month. The September figure was up sharply from a 1 percent increase in the same month last year. <WWD>

Hedgeye Retail’s Take:   While still early in forming a trend, the acceleration (similar to what we saw across all of retail) is noteworthy as H&M looks to build sequential momentum.


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PENN’s stock has done well as table games have taken off in West Virginia and some regional markets are finally stabilizing. We think Q3 will come in above guidance and a little ahead of the street.



PENN should beat company guidance and consensus by a decent amount when it reports Q3 earnings next Thursday.  How do we know?  We don’t for sure – we’d have to have inside information to know that – but we do know that numbers have trended a little better and costs shouldn’t be going anywhere, yet.


For Q3, we are projecting EBITDA and EPS of $161 million and $0.37, respectively, versus the Street at $153 million and $0.33.


The introduction of table games in West Virginia and PA should add $40MM of sequential revenues alone to PENN’s 2Q revenues of $598MM and at least $11MM of EBITDA if we assume last quarter’s margins for each respective property.  Aside from WV and PA, PENN’s Mississippi properties and Bangor should have a sequential uptick in revenues.   In addition, most of the racetrack properties should post positive comps.  The rest of the portfolio is not as exciting with mostly flat or slightly down same store EBITDA at most of them.  The two other large positive deltas from last year will be corporate expense – down $9m due to huge lobbying expenses in last year’s Q3 – and lower interest expense.


Conference call commentary will be similar to Q2 in the sense that it will be cautious, but on the margin it should be slightly more bullish.  Table games play is off the charts in West Virginia and PA, and there appears to be a little more certainty and stability in most of the regional markets.


PENN and PNK still look like the regional operators with the most credible investment stories. 


The Macau Metro Monitor, October 15th 2010



A unit of New Cotai filed suit against S'pore developer CapitaLand Ltd, eSun Holdings Ltd. and their unit East Asia Satellite Television Ltd., of breach of contract, inducement of those breaches and unlawful conspiracy over their deal concerning Macao Studio City.  "We are disappointed that these legal proceedings had to be initiated," said New Cotai Chief Executive David Friedman. "However, after making exhaustive efforts to resolve the situation amicably, we believe we had no choice but to take this step to protect our investment and Macao Studio City."  CapitaLand—which has an effective 20% interest in the project—said on Thursday that "eSun has affirmed an indemnity in favor of CapitaLand in respect of any losses which may be suffered by CapitaLand in any legal proceedings" brought by New Cotai regarding the Macao Studio City project.


WHEN WILL IT ALL POP? Intelligence Macau

IM believes that the credit bubble in China may pose a risk to the Macau market as bank loans may bust and consumer credit may spiral out of control. But obviously the question is when will that fear become a reality - if ever?  No one knows but as long as state-run banks continue to pump liquidity into the economy and the bank recapitalizations remain at a slow, steady pace, the VIP and Mass sectors will continue to be strong.



The surge in visitor arrivals to Macau may be due to the easing of independent travel restrictions in China.  Beijing has already shortened the time for visa application process from 1 month down to between 7-10 days since last month. Other provinces have also shown signs of speeding up in terms of the application process.


S'pore's Urban Redevelopment Authority (URA) showed that 911 private homes were sold in September, a 27% MoM drop.  The 911 units sold were also the second lowest monthly sales this year, behind June's figure of 847 units.  The drop follows the latest round of cooling measures from the S'pore govt that took effect on 30 August.

Malthusian Tails

“The power of population is indefinitely greater that the power in the earth to produce substance for man.”

-Thomas Malthus


Any regular reader of our work, especially when Keith is penning the Early Look, is familiar with our work on investment durations.  Our investment process enables us to develop investment ideas on 3 durations: TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less).  We call this our Trade-Trend-Tail Process.


There is, of course, another duration, which I will simply call the longer term.  This is the time frame beyond 3 years.  While it is difficult to make an investment decision today, for an event that will happen beyond 3 years, that doesn’t mean we shouldn’t be contemplating the longer term.  One key force that will shape the longer-term with some predictability is demographics.


One of the most well known and earliest recorded demographers was the Reverend Thomas Robert Malthus.  His primary work on this front was his treatise, “An Essay on the Principle of Population”, which he published in 1798 at the age of 32.  Malthus started with the basic premise that society could not be improved with time, so as population increased, so too would the constraints on that society.  Eventually, a large enough population would not be self sustaining and, as Malthus wrote:


“The superior power of population cannot be checked without producing misery or vice."


In contrast to Malthus, if we have learned anything over the last few centuries it is that the welfare of societies can and will improve with population growth in conflict with Malthus’ primary tenet, but Malthus did leave us with a few salient points: 1) demographics are powerful and 2) changing populations will constrain societies.  Below we’ve outlined 3 key Malthusian Tails that we are focused on.


1.  Marriage Rates in the United States - We wrote an intraday note on this point to our Hedgeye Macro subscribers earlier this week (if you aren’t currently receiving our full product, please email us at to set up a trial); in the last decade we have seen a dramatic shift in marriage status among young adults.  In fact, in 2000 almost 55% of the 25 – 34 cohort was married, while 35% was never married.  Amazingly less than 9 years later, by 2009, only 45% of that cohort was married, while 46% of the cohort was unmarried. 


Naturally, as people marry later, birth rates will decline, which will lead to lower population growth in the future and the ability, or lack thereof, to fund future entitlement programs.  Additionally, and near and dear to our Housing Headwinds call, is that homeownership rates are impacted by this demographic shift.  According to the most recent data from the Census Bureau, homeownership rates are 84.2% for married couples and 50.3% and 59.6% for male and female singles, respectively. 


2.  The Aging Japanese Population – One of our Q4 themes was entitled, Japanese Jugular, which describes our long term negative view of Japan.  Once again, a key driver here is demographics, in particular the aging of society.  In 1985, roughly 10% of Japanese society was over 65 years old.  Currently, almost 23% of Japan’s population is over 65 years old.  The great Keynesian experiment in Japan will likely eventually fail because of this aging of society, and its future demands on the government as it relates to retirement and healthcare entitlements. 


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%.  In just ten years time, that ratio will be equal to 48%.  We’ve likely already seen the negative inflection point in this trend within the last year, as Japan’s pension fund announced it will be increasing its asset sales by a factor of 5x to support pension payment requirements.


3.  The Aging Baby Boomers in the U.S. – Our Healthcare Team, led by Tom Tobin, presented a Black Book on this topic last week, which was titled:  “HEDGEYE HEALTHCARE: AGING OF AMERICA: DEMOGRAPHICS OF DEMAND AND PROFITS IN HEALTHCARE.” (If you are an institutional investor and would like to sample or trial some of their superb work on the Healthcare sector, please email


In effect, the glacial movement of U.S. demographic trends holds specific consequences both for healthcare and the larger economy broadly. For Healthcare investors, the Baby Boomer investing dogma mistakenly centralizes per capita spending as the core driver of the thesis.


While absolute per capita consumption is higher for those in their 70s & 80s, the growth rate of healthcare consumption is slower and there are far fewer people to support it.  The period of greatest acceleration of per capita consumption comes as people age into their 50s - a demographic now in the heart of a secular decline which won’t see bottom until 2018.


Boomer Employment (45-64 yr olds) reached its crescendo in the 1 period with peak earnings and peak disposable income occurring alongside historic lows in unemployment.  Now, with this segment of the working population in deceleration mode, the U.S. workforce nearing a peak in average age, and the echo boomer generation (30-39 yr. olds) years away from peak consumption growth, the healthcare and broader economy face significant long-term headwinds.


At risk of starting off your weekend on too somber of a tone, I will leave you with one last aging quote from Groucho Marx that is counter to our thoughts on demographics:


“Age is not a particularly interesting subject.  Anyone can get old.  All you have to do is live long enough.”


Yours is risk management,


Daryl G. Jones


Malthusian Tails - DJEL

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