Tag: US Market

Business Strategy and Outlook

No-moat MGM Resorts is facing material near-term headwinds from COVID-19 as well as elevated operational risk in Macao from government plans to increase supervision of casinos. Still, we think MGM has a healthy liquidity profile to see it through this turmoil and remains positioned for the attractive long-term growth opportunities in Macao (22% of pre-pandemic 2019 EBITDAR), U.S. sports betting, and Japan (accounting for an estimated 10% of 2027 EBITDAR, the first year of likely operation). 

We see solid Macao industry visitation over the next 10 years, as key infrastructure projects that alleviate Macao’s congested traffic (Pac on terminal expansion and Hong Kong Bridge in 2018, light-rail transit at the end of 2019, and reclaimed land in 2020-25) come on line, which will expand the region’s constrained carrying capacity and add attractions, thereby driving higher visitation and spending levels. As MGM holds one of only six gaming licenses, it stands to benefit from this growth. Further, MGM Resorts has expanded its room share in Macao to 8% from 3% with its Cotai property, which opened in February 2018. That said, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government.

In the U.S. (78% of pre-pandemic 2019 EBITDA), MGM’s casinos are positioned to benefit from a multi-billion-dollar sports betting market, generating an estimated mid-single-digit percentage of the company’s 2024 sales. That said, the U.S. doesn’t offer the long-term growth potential or regulatory barriers of Macao; thus, we do not believe the region contributes a moat to MGM. Still, there have been very minimal industry supply additions this decade, and this should support solid industry Strip occupancy, which stood at around 90% in pre-pandemic 2019.

We expect MGM to be awarded one of only two urban gaming licenses in Japan, with a resort opening in 2027, generating attractive returns on invested capital in the teens.

Financial Strength

MGM entered 2020 in its strongest financial health of the past 10 years, in our view. This was illustrated by its 3.7 times debt/adjusted EBITDA in 2019 versus 13 times and 5.7 times in 2010 and 2015, respectively. It was also buoyed by MGM having recently exited an investment cycle, where the company spent $1.6 billion on average annually during 2015-19 to construct and renovate U.S. and Macao resorts versus the $271 million it spent on capital expenditure in 2020. We believe MGM has sufficient liquidity to remain a going concern even with zero revenue for a few years. The recent sales of underlying casino assets (Bellagio in November 2019, Circus Circus in December 2019, and MGM Grand/Mandalay Bay in February 2020) provided it with around $6.9 billion in cash. The company recently entered into leaseback asset sales of Aria, Vdara, and Springfield, raising over $4 billion in cash in 2021. Also, MGM is set to receive $4.4 billion in cash for its ownership in MGM Growth Properties, which is scheduled to be acquired by Vici in the first half of 2022. The firm has taken further action to lift its liquidity profile by reining in expenses, tapping its $1.5 billion credit facility (which has since been paid), suspending dividends and repurchases (which have since been reinstated), and raising debt. MGM has $1 billion of debt scheduled to mature in 2022.

Bulls Say’s

• We expect MGM to be awarded one of only two urban Japanese gaming concessions due to its strong experience operating leading resorts in Las Vegas and its successful record of working with partners 

• MGM is positioned to participate in Macao’s long-term growth opportunity (22% of pre-pandemic 2019 EBITDAR) and has seen its room share expand (to 8% from 3%) with the opening of its Cotai casino in February 2018.

• MGM’s U.S. properties are positioned to benefit from the expansion of the multi-billion-dollar domestic sports betting market

Company Profile 

MGM Resorts is the largest resort operator on the Las Vegas Strip with 35,000 guest rooms and suites, representing about one fourth of all units in the market. The company’s Vegas properties include MGM Grand, Mandalay Bay, Mirage, Luxor, New York-New York, and CityCenter. The Strip contributed approximately 49% of total EBITDAR in the pre-pandemic year of 2019. MGM also owns U.S. regional assets, which represented 29% of 2019 EBITDAR. We estimate MGM’s U.S. sports and iGaming operations will be a mid-single-digit percentage of its total revenue by 2024. The company also operates the 56%-owned MGM Macau casinos with a new property that opened on the Cotai Strip in early 2018. Further, we estimate MGM will open a resort in Japan in 2027.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

In October 2020, Bed Bath & Beyond put forth an updated strategy to revitalize its brand and regain customer confidence by focusing on its core properties. As such, the company divested peripheral brands such as Cost Plus and Linen Holdings in order to focus on the Bed Bath & Beyond, Buy Buy Baby, Harmon Face Value, and Decorist labels. To help elevate its brand perception, it has combined its online and in-store inventory management with its new “omni-always” initiative in the hopes of capturing more e-commerce business and avoiding the long restock times and uneven inventories that previously plagued the firm. Additionally, it’s investing heavily in both its digital and brick-and-mortar platforms, with a revamp to the website for a more frictionless checkout process and a remodel of its physical stores to offer a cleaner and more enjoyable shopping experience. The firm has attempted to rely less on its iconic blue coupons by giving consumers a good everyday value (it is concluded discounts will persist to some degree over the long term). It also plans to right size by shuttering underperforming Bed Bath stores, shrinking the total store base to around 1,000 by the end of 2021 (from 1,500 at the end of 2019). In contrast, management expects 50% sales growth at the baby label by 2023 via new markets, with the brand already set to deliver $1.3 billion in sales in 2021. It is seen total sales declining in 2021 as the footprint continues to contract before stabilizing at a low-single-digit growth rate in 2023.

Longer term, it is conjectured the 2030 operating margin to reach 5%-6%. This improvement is primarily supported by gross margin gains (which reach 37.7%, below the 38%-plus corporate goal) from a greater focus on private label, including the introduction of 10 new owned brands. It also benefits from a lower promotional cadence thanks to SKU rationalization and the utilization of more robust inventory management processes. However, it is foreseen these gains to be offset by higher investment as the home furnishing landscape remains highly fragmented and competitive, limiting profitability to levels that are structurally lower than in the past.

Financial Strength

Bed Bath & Beyond’s cash position is solid and efforts to reduce the firm’s debt load resulted in a positive net cash position at fiscal year-end 2020. Before the firm’s $1.5 billion debt raise in 2014, it had been debt-free since 1996 (excluding acquired debt), using cash generated from operations to fund new store openings and a handful of small bolt-on acquisitions. The firm has access to liquidity through its $1 billion credit facility, which expires in 2026 and captured another $600 million-plus in cash through the sale of Personalizationmall.com, Linen Holdings, Christmas Tree Shops, One Kings Lane, and Cost-Plus World Market brands. It reduced gross debt in 2020 (with long-term debt at $1.2 billion at November 2021 versus $1.5 billion at the end of fiscal 2019) and plans to continue paying down its debt, aiming to reach a gross debt ratio of 3 times by 2023. There is ample cash on hand (roughly $509 million as of Nov. 27, 2021) to cover near-term expenses like operating lease obligations.

Over the past five reported fiscal years, the firm has produced cumulative free cash flow (cash from operations minus capital expenditures) of $2.1 billion. However, it is anticipated this level to be tempered over 2021-23 as Bed Bath spends around $375 million annually to improve new stores, existing stores, its supply chain, and technology in this time frame. Free cash flow to equity has averaged about 4% of revenue during the past five reported years, which is decent for a mature company that is still spending to remain competitive, but it is likely this level to decline as secular headwinds weigh on performance and necessary investment levels pick up. Despite the higher spending ahead, Bed Bath has a plan to complete its share $1 billion in shares buy back by the end of fiscal 2021.

Bulls Say’s

• Less discretionary categories such as linens, towels, and cookware offer some resiliency amid macroeconomic cyclicality. Registries across bridal, baby, and gift have historically provided a steady stream of customers.
• The closure of numerous underperforming stores by the end of 2021 could help lift the profitability of the business faster than it can be anticipated as better performing stores make up a greater proportion of the fleet.
• With a push into expanding the representation of owned brands (already accounting for 20% of sales), gross margin metrics could expand faster than it can get forecast.

Company Profile 

Bed Bath & Beyond is a home furnishings retailer, operating just under 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 809 Bed Bath & Beyond stores, the company operates 133 Buy Buy Baby stores and 53 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, One Kings Lane, Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost-Plus World Market.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

In October 2020, Bed Bath & Beyond put forth an updated strategy to revitalize its brand and regain customer confidence by focusing on its core properties. As such, the company divested peripheral brands such as Cost Plus and Linen Holdings in order to focus on the Bed Bath & Beyond, Buy Buy Baby, Harmon Face Value, and Decorist labels. To help elevate its brand perception, it has combined its online and in-store inventory management with its new “omni-always” initiative in the hopes of capturing more e-commerce business and avoiding the long restock times and uneven inventories that previously plagued the firm. Additionally, it’s investing heavily in both its digital and brick-and-mortar platforms, with a revamp to the website for a more frictionless checkout process and a remodel of its physical stores to offer a cleaner and more enjoyable shopping experience. The firm has attempted to rely less on its iconic blue coupons by giving consumers a good everyday value (it is concluded discounts will persist to some degree over the long term). It also plans to right size by shuttering underperforming Bed Bath stores, shrinking the total store base to around 1,000 by the end of 2021 (from 1,500 at the end of 2019). In contrast, management expects 50% sales growth at the baby label by 2023 via new markets, with the brand already set to deliver $1.3 billion in sales in 2021. It is seen total sales declining in 2021 as the footprint continues to contract before stabilizing at a low-single-digit growth rate in 2023.

Longer term, it is conjectured the 2030 operating margin to reach 5%-6%. This improvement is primarily supported by gross margin gains (which reach 37.7%, below the 38%-plus corporate goal) from a greater focus on private label, including the introduction of 10 new owned brands. It also benefits from a lower promotional cadence thanks to SKU rationalization and the utilization of more robust inventory management processes. However, it is foreseen these gains to be offset by higher investment as the home furnishing landscape remains highly fragmented and competitive, limiting profitability to levels that are structurally lower than in the past.

Financial Strength

Bed Bath & Beyond’s cash position is solid and efforts to reduce the firm’s debt load resulted in a positive net cash position at fiscal year-end 2020. Before the firm’s $1.5 billion debt raise in 2014, it had been debt-free since 1996 (excluding acquired debt), using cash generated from operations to fund new store openings and a handful of small bolt-on acquisitions. The firm has access to liquidity through its $1 billion credit facility, which expires in 2026 and captured another $600 million-plus in cash through the sale of Personalizationmall.com, Linen Holdings, Christmas Tree Shops, One Kings Lane, and Cost-Plus World Market brands. It reduced gross debt in 2020 (with long-term debt at $1.2 billion at November 2021 versus $1.5 billion at the end of fiscal 2019) and plans to continue paying down its debt, aiming to reach a gross debt ratio of 3 times by 2023. There is ample cash on hand (roughly $509 million as of Nov. 27, 2021) to cover near-term expenses like operating lease obligations.

Over the past five reported fiscal years, the firm has produced cumulative free cash flow (cash from operations minus capital expenditures) of $2.1 billion. However, it is anticipated this level to be tempered over 2021-23 as Bed Bath spends around $375 million annually to improve new stores, existing stores, its supply chain, and technology in this time frame. Free cash flow to equity has averaged about 4% of revenue during the past five reported years, which is decent for a mature company that is still spending to remain competitive, but it is likely this level to decline as secular headwinds weigh on performance and necessary investment levels pick up. Despite the higher spending ahead, Bed Bath has a plan to complete its share $1 billion in shares buy back by the end of fiscal 2021.

Bulls Say’s

• Less discretionary categories such as linens, towels, and cookware offer some resiliency amid macroeconomic cyclicality. Registries across bridal, baby, and gift have historically provided a steady stream of customers.
• The closure of numerous underperforming stores by the end of 2021 could help lift the profitability of the business faster than it can be anticipated as better performing stores make up a greater proportion of the fleet.
• With a push into expanding the representation of owned brands (already accounting for 20% of sales), gross margin metrics could expand faster than it can get forecast.

Company Profile 

Bed Bath & Beyond is a home furnishings retailer, operating just under 1,000 stores in all 50 states, Puerto Rico, Canada, and Mexico. Stores carry an assortment of branded bed and bath accessories, kitchen textiles, and cooking supplies. In addition to 809 Bed Bath & Beyond stores, the company operates 133 Buy Buy Baby stores and 53 Harmon Face Values stores (health/beauty care). In an effort to refocus on its core businesses, the firm has divested the online retailer Personalizationmall.com, One Kings Lane, Christmas Tree Shops and That (gifts/housewares), Linen Holdings, and Cost-Plus World Market.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook:

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. We believe the concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match.

Financial Strength:

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times. Furthermore, capital expenditures to fuel store growth are fairly discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain.

Bulls Say:

• Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
• Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
• As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile:

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.