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JNY: Ruined Everything By Being Itself

JNY: Ruined Everything By Being Itself

 

Earlier this week we noted that this story would break down within 2-quarters. We did not expect it to be within 2-days.  In this note we focus on what’s changed.  Bottom line = If 2011 estimates don’t shake out close to a buck, this puppy needs to see more downward revisions.

 

  1. First off, the top line grew at 20%, while GAAP EPS was down 7%, and the triangulation of sales/inventories and margins is as bearish as we’ve seen for JNY in 2 years (see Exhibit 1).
  2. This might be nit picking. But don’t you love how this company prints a GAAP number of $0.34, but they say that all these impairment charges and realignment costs (due to underinvestment and mismanagement) are not a part of ongoing business. Why do they also have such costs in the year-ago period? Translation = yes, impairing assets and continuous realignment IS a part of JNY’s business. Note to management: Stop highlighting it as a non-recurring item.
  3. 20% top line was a full 6% better than our estimate. This included the layering on the Stewart Weitzman acquisition – as expected, as well as better than expected retail comps of 2.5%. But the bulk was driven by a greater push (and we mean Push) in Better Apparel and Jeanswear. Net/net, this should have resulted in a BIG gross margin number. Right?
  4. Nope. Gross margins were down 205 bps - which was entirely driven by the Wholesale Better Apparel and Jeanswear businesses. Management was not clear about the drivers, but continually highlighted input costs and freight costs. Here’s what we don’t get… These sales occurred during the third quarter based on product that was built/assembled in 2Q and composed of materials procured in 1Q. Translation = you can’t look at the $1.27 cotton price we see today and possibly imagine that this is showing up in JNY’s margins yet. That will hit in 1Q11.  So what gives?

    The reality is that we don’t know. That is super scary.

    1. Our sense is that Retailers, Manufacturers and other supply chain partners that actually have a risk management process are already jockeying for margin dollars from their weaker partners. Yes, that’s JNY. Think about it. If sales are weak in department stores, can Macy’s turn to Ralph Lauren and demand margin dollars? Not a chance. Historically, the weak brands have funded the stronger brands.  But one major change of late is that LIZ has been pulled out of the equation given that it is exclusive with JC Penney and QVC. The department stores have a big set of crosshairs on JNY.
    2. Another reality is that there’s simply more ‘stuff’ to sell. Inventories were so lean over the past 2 years that orders finally ticked up eight months ago, increased product across most of retail, and has been hitting our shores since August. Yes, it means that top line numbers will be there. But in no way, shape or form does it mean that the margins will be there. 
    3. In fact, when putting b) and c) together, we’d argue that the GM erosion hardly came from cotton over a buck – but more likely due to more units in the marketplace. This, on the margin is probably good for the TJX’s and ROST’s of the world.
    4. Retail sales were up 6%, including a respectable 2.5% comp. But then I ask… How come margins are still flat versus last year at NEGATIVE 6.2%? What would they look like if comps went negative? For a story where the bull case is so focused on a recovery in Retail margins – this print raised some serious questions. Sometimes margins are bad because it’s simply a bad business – not because profitability is ‘artificially depressed.’ Maybe a few years back it was artificially high.

In the end, our core thesis with JNY remains simple and unchanged. Without a major reinvestment in the company – JNY is locked into earning $1-$1.50 in perpetuity. When people start to believe $2 EPS numbers (which the Street did last week, and no longer does today with a 25% melt-down), then the short case becomes more powerful. When the cash flow stream inevitably blows up because the company can’t kick the can down the alley anymore, then we can put on our bull hats. Here, unless the Street ends up at about a buck in FY11, there’s more downward earnings revisions to come.

 

JNY: Ruined Everything By Being Itself - JNY SIGMA

 


MARRIOTT ANALYST DAY PART 2 - INTERNATIONAL

Marriott International Division Commentary + Q&A

 

 

Amy McPherson: President and Managing Director, Europe

  • Have 179 hotels in Europe:
    • 49% Marriott
    • 23% Courtyards
    • 18% Renaissance
    • 5% Ritz
  • Over the last few years, new openings in Europe have shifted towards branded from independent brands
    • As of 2009, only 30% of hotels were branded
    • 2005-2007 openings: 52% branded
    • 2008-2010E opening: 61% branded
  • European travel spend was $1.34BN in 09 vs. $1.15BN for NA
  • 70% of MAR guests in Europe are European (mostly from UK, Germany and France)
  • European contribution to other regions:
    • NA: 2%
    • Caribbean & LATAM: 5%
    • ME&A: 34%
    • Asia Pacific: 10%
  • Marriott is the 10th largest hotel company in Europe with 40,258 rooms – Accor is #1 with 247,603 rooms as of June 2010.
    • 6% of branded supply
  • Just renovated 32 hotels in Europe
  • UK, Germany, and France generate 65% of their revenues in Europe
  • House profit margins in Europe are expected to be 35% higher than peak levels in 2007
  • Have centralized service centers across Europe to drive efficiencies
  • Expect to double their portfolio in Europe by 2015:
    • Autograph
    • Courtyard and FS expansion
    • Using MAR capital to acquire strategically located hotels or chain acquisitions
    • AC hotels
  • AC hotels:
    • 3rd largest brand in Spain
    • 92 hotels (9,500 rooms) located primarily in Spain (10 in Italy and 2 in Portugal)
    • At closing will bump them to #5 in Europe
  • Expect 60-61,000 rooms by 2013 with 48,000-49,000 organic additions from the 41,000 rooms at YE 2010E

Simon Cooper: President and Managing Director, Asia Pacific

  • Have 2.4MM rooms in Asia Pacific, 65% of which are independent, 27% are chain managed and 8% are franchised
    • Of the 647,000 rooms that are chain managed
      • Marriott has 6% share
  • Source of Asia Pacific room nights:
    • 58% Asia Pacific
    • 29% NA
    • 10% Europe
  • China is the fastest growing market with 58MM inbound travelers
  • China is spending $117/per capita on infrastructure spend vs. $17 in India
    • Rail and low cost carriers are creating a new market of leisure travelers
  • Courtyard is full service in Asia
  • Signed a new agreement with Ctrip (China’s largest online travel agency with over 60% market share) to partner with Marriott Rewards this morning

Paul Foskey: Executive VP International Development, Asia Pacific

  • Grew from 35,110 rooms in 2007 to 47,000 at 2010E YE
    • All managed
  • 47,000 room distribution:
    •  46%: China
    • 15%: SE Asia
    • 12%: Indochina
    • 12%: Japan & S. Korea
    • 7% Pacific
  • 47,000 room distribution:
    • 30%: Marriott
    • 24%: Renaissance
    • 15%: Courtyard
    • 14%: JW Marriott
    • 13%: Ritz
  • Signed pipeline: 17,000 rooms
    • 43%: China
    • 5%: SE Asia
    • 39%: Indian subcontinent
    • 13% Indochina
  • 17,000 room distribution:
    • 30%: Marriott
    • 14%: Renaissance
    • 25%: Courtyard
    • 20%: JW Marriott
    • 8%: Ritz
  • Marriott is ranked 4th in open rooms in China and really focus on the gateway and primary cities (18.5k rooms)
    • Projecting that their rooms will generate $1BN in 2010, the same as IHG’s 45k rooms in China – since non gateway cities have very little pricing power
    • So Marriott captures 20% of the revenues with only 15% of the supply vs (AC, HLT, H, IHT, HOT, and Shangri-la)
  • In India, wealth is much more geographically distributed
    • Only 107k rooms
    • Mostly new
    • Less rate disparity between primary and secondary cities
    • Marriott has 2,737 rooms in India – all managed (2nd largest western brand)
  • Goal to launch 75 Fairfield units in 10 years. Also potential for Autograph.
  • Expect to have 72-74,000 rooms in Asia Pacific by 2013, of which 62,000-64,000 are included in their 3 year plan
  • 50% of MAR’s fee revenue in the region comes from outside of India and China

Housing Headwinds Update

***The report below is a combination of excerpts from recent reports out of our Financials vertical, let by Josh Steiner. If you are an institutional client or prospective client and aren’t yet receiving Josh’s work on housing, credit, and the financials, please email to learn more about how we can get you setup.***

 

Case-Shiller Falls Month-Over-Month and Decelerates Rapidly Year-Over-Year

The Case-Shiller Home Price Index fell 0.21% month-over-month in August (non-seasonally adjusted), versus up 0.65% in July. On a year-over-year basis, growth decelerated to 1.6% in August versus 3.1% in July.  

 

Next Month Will Get Worse, Potentially Much Worse

It's critical to understand the timing associated with the Case-Shiller series.  The printed number is a 3-month rolling average released on a two-month delay, so the August release today is the average of June, July, and August.  Case-Shiller measures closing activity, which tends to lag signing activity by 1-2 months. To compare Case-Shiller to the MBA Mortgage Purchase Applications Index, we should look at applications from April/May/June.  Thus, today's Case-Shiller print is still capturing a benefit from the strong April purchase activity driven by the tax credit.  Next month, the September print will reflect signing activity from May/June/July, which will be substantially weaker than today's release.  Specifically, the average of May/June/July is 13% lower than April/May/June from a demand perspective. With supply remaining at historical highs, we expect prices to increasingly come under pressure.  The chart below demonstrates.  

 

Housing Headwinds Update - 1

 

The following chart shows Case-Shiller home price data on a month-over-month basis. As we've highlighted previously, by S&P's own admission, investors should not rely on the seasonally adjusted (SA) data as their seasonal adjustment factors are essentially unreliable. Rather, investors should rely on the non-seasonally-adjusted data as a better indicator of underlying trends.  It's worth emphasizing that the Case-Shiller series does have a notable seasonality - specifically, it generally improves sequentially through April, May, and June - so the NSA data has its own shortcomings.  

 

Housing Headwinds Update - 2

 

The chart of year-over-year price change below shows another deceleration in August.

 

Housing Headwinds Update - 3

 

Existing Home Sales Rise as Prices Fall

Existing Home Sales rose 9.7% to 4.53 million (seasonally adjusted annualized rate) in September.  As Existing Home Sales are a lagging data series, it is still benefiting from a rebound off of the post-tax-credit lows. Below we show charts of existing home sales and median prices.

 

Housing Headwinds Update - 4

 

Housing Headwinds Update - 5

 

Housing Headwinds Update - 6

 

Housing Headwinds Update - 7

 

Inventory Remains Near Record Highs

Inventory rose sequentially to 4.04 million, though was reported to bedown 1.9% after an upwardly-revised August print of 4.12 million homes (revised from 3.98mn units). A higher sales rate brought months supply in from 11.6 to 10.5 months.  While this is the second sequential improvement in the months supply series, by historical standards, 10.5 months is consistent with the 2008 highs.  Meanwhile, the median price of Existing Homes fell 3.9% month-over-month from $178,600 to $171,700. 

 

Housing Headwinds Update - 8

 

Housing Headwinds Update - 9

 

New Home Sales Rise 6.6% to 307k - Should We Get Excited?

Don’t be fooled into thinking 307k is a strong number. In fact it is right in line with the average we’ve seen post the tax credit expiration as the charts below show, and it remains consistent with our cumulative displacement theory (republished below) that new home sales will need to remain around the 300k level for the better part of the next ten years, much to the disappointment of those who’ve bet on a snappy recovery over the next 12-24 months.

 

New Home Sales rose 6.6% to 307k SAAR. Is this a cause for celebration? Remember that it was just six months ago that a then-record-low print of 300k caused significant angst and a material selloff. Since then the numbers have remained in this 300k range. Expectations appear to have come a long way. To summarize our cumulative displacement theory, there was an epidemic of overbuilding during the bubble, which will take a very long time to work off.  Using a sales rate of 300k, we calculate that sales would have to continue at this level for ten years for the cumulative displacement from the mean to return to zero. Yes, new home inventory is very low, but we don't see sales rebounding anytime soon.  

 

Housing Headwinds Update - 10

 

The hangover from the tax credit expiration appears to remain more serious than the pull forward effects. As the following chart shows we are now into our fifth month of unprecedented weakness in new home sales, which begs the question: is there something else going on, something structural? We think the answer to this question is yes, and we explain why we think that in our cumulative displacement analysis below.

 

Housing Headwinds Update - 11

 

Taking a longer-term view back to 1993, new home sales continue to decline. The yellow line in the following chart shows the rolling six-month average - the housing equivalent of the 200DMA. This trend line shows no sign of improvement - indeed, it is worsening.

 

Housing Headwinds Update - 12

 

Joshua Steiner, CFA

 

Allison Kaptur


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R3: WMT, SKS, AMZN, and E-commerce

R3: REQUIRED RETAIL READING

October 27, 2010 

 

Wal-Mart may be onto something with its Groupon-style Facebook promotion.  With consumers required to “buy in” to a particular offering, we wonder if this isn’t the newest and most clever way of clearing large amounts of a single item in a very short, efficient time frame. 

 

 

RESEARCH ANECDOTES

 

- Yet another reason why pet products continue to sell well.  Think the canine costume concept is crazy? Online searches for Halloween “dog costumes” outpaced searches for baby and toddler costumes this year, according to search analytics provider Searchmetrics.  Sounds like a positive for PETM.

 

- As Carlyle plans its IPO for luxury skiwear company Moncler, it’s clearly painting a retail growth story.  After only having one boutique in the US for years, two new stores have opened in NYC and Chicago over the past several months.  Expect to hear about unit growth on the roadshow as the model shifts towards owned distribution.

 

- Under Armour is back in Manhattan for another holiday season, this time with a pop-up store in Soho. Recall that last year’s location occupied a vacant location on 57th st and 6th Ave.  This year’s Spring St. location fills a spot that Limited used last year as a pop up location.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Wal-Mart Takes A Hint From Groupon - Daily deals service Groupon is the current belle of the ball when it comes to the digital world. It's no surprise that retail giant Walmart is paying attention. Yesterday Walmart began running Facebook ads promoting a new service it is calling CrowdSaver. The offer: Walmart will give 18% off a plasma TV if it gets 5,000 likes. Walmart encourages its fans to rally their friends in order to ensure the deal happens. The move is a twist on the Groupon model, which offers steep discounts on goods and services if a critical mass of people take up the offer. <brandweek.com>

Hedgeye Retail’s Take:  With peer influence at the top of the list of purchasing drivers, we’d expect the Groupon model to move beyond imitation at just Wal-Mart.  There’s nothing better to a retailer than knowing exactly what demand is for a particular item.  If executed properly, Groupon can act like a “forward” order book on the consumer level. 

 

Saks and Macy's on E-Commerce - Saksfifthavenue.com is Saks Inc.’s second-largest store, and although it lags the revenue of the chain’s Fifth Avenue flagship, the luxury retailer’s e-commerce unit is generally twice as profitable as the brick-and-mortar business, Denise Incandela, president of Saks Direct, said during a panel discussion. The emphasis has shifted to making sure e-commerce continues to grow and takes a disproportionate piece of total market share as it does so. Macy’s Inc., with more than 600,000 Facebook fans, is also using social media primarily for relationship building. Digital garnered about 10% of Macy’s media spending this year ­­­­­­— compared with zero three years ago — and the percentage is expected to double in another couple years. When it comes to digital media, Macy’s knows what it’s getting. <wwd.com/business-news>

Hedgeye Retail’s Take: When your core business is barely profitable, it’s not saying much when your e-commerce platform runs at 2x the profitability of the base. 

 

Amazon and QVC Meet the iPad - Both Amazon.com and QVC have reworked their sites specifically for the iPad. The Amazon app enables consumers to post products on Facebook and Twitter, while QVC shoppers can watch a high-definition feed of the retailer’s live broadcast.  <internetretailer.com>

Hedgeye Retail’s Take:  With so many iPads in the market already, it won’t be long before this is no longer news.  The iPad is essentially a modern day HD, live action catalog.  Clearly a big opportunity here for retailers looking to sell their wares anytime, anywhere.

 

REI to Appear on Oprah Friday - National outdoor gear and clothing retailer REI will be featured on two upcoming episodes of “The Oprah Winfrey Show.” The episodes, titled “Oprah and Gayle’s Big Yosemite Camping Adventure,” highlight their first-time camping adventures in Yosemite National Park and a trip to the REI store in Fresno, Calif. <sportsonesource.com>

Hedgeye Retail’s Take: The ‘Oprah Effect’ still matters and hits REI in stride as the retailer continues to open stores aggressively. With an typical footprint of ~25,000 sq. ft., the outdoor retailer has been opportunistic in taking over locations from defunct concepts like Linens-N-Things and is now planning three new locations in the New York tri-state area in 2011 including a Manhattan location next fall.

 

Fleece-Maker Polartec Said to Be Seeking Acquirer in $200 mm Sale - Polartec LLC’s parent, Versa Capital Management, is seeking a buyer for the century-old maker of the Polarfleece material, according to two people with knowledge of the matter. <bloomberg.com/news>

Hedgeye Retail’s Take: Couldn't be better timing for soliting bids with cotton hitting new highs again this week.

 

Luxottica Group Sees Renewed Interest in Luxury - Strength at retail and wholesale across all regions and renewed interest in luxury brands helped Luxottica Group SpA lift its sales 19.7%. Sales in Europe and in the U.S. grew 12.7% and 8.5%, respectively. Emerging markets gained 26.2%. Luxottica, which owns the Oakley and Ray-Ban labels, holds eyewear licenses with brands including Bulgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Polo Ralph Lauren, Prada, Salvatore Ferragamo, Tiffany and Versace. Earlier this month, the company also inked an agreement with Coach starting in January 2012.  <wwd.com/business-news>

Hedgeye Retail’s Take: With an increasing amount of product shortages across the luxury sector (LV, Chanel) it should come as no surprise that licensed eyewear is also following suit with strength.

 

Mastercard's Web View - Although coming off a smaller base, e-commerce is growing at a significantly higher percentage than overall retail. In September, total e-commerce rose 7.8%; apparel e-commerce was up 13.4%; children’s e-commerce gained 14.4%, women’s apparel e-commerce rose only 1%, and jewelry was off 5.9%, versus a year ago. E-commerce in women's apparel has grown from a 9% share in 2007 to 13.8% of total sales year-to-date in 2010, and the year’s not over yet. But, they’re not seeing the same progress in jewelry as they’re seeing in apparel categories. Looking at the pace of online business this year there were online peaks in terms of share due to weather and people at work an not on vacation with January peaking at 18.6% of sales. Online holiday sales will ramp up on Nov. 9 with 14 of the top 50 online spending days in the last 22 days of the month. The top spending online day is expected to be Dec. 14., and the biggest day for retail overall is Nov. 26, which is forecast to do $19 billion in sales. The top 10-day total is estimated to be a $151 billion spending opportunity. <wwd.com/business-news>

Hedgeye Retail’s Take: More confirmation that e-commerce remains the bright spot of growth within the retail space.  Recall that December 14th is now known as Green Tuesday. 

 

Ni hao, Big Chinese Tourist Who Spends - China’s fast-growing economy is fueling a rise in outgoing tourism, with shopping for high-end fashion and beauty products near the top of travelers’ agendas — a windfall that is creating happy smiles among luxury brands and retailers from Paris to Los Angeles. Brands from Louis Vuitton to Ralph Lauren, Graff to Gucci have all pointed to the wave of Chinese tourists traveling abroad as a key factor in luxury’s resurgence after the global recession of 2008. Indeed, the China Tourism Academy estimates Chinese tourists spend about 500 euros, or about $700, an hour when shopping in Paris, home to Galeries Lafayette and Louis Vuitton’s flagship on the Champs-Elysées.Chinese tourists made 47 million trips abroad last year, according to China’s National Tourism Research Institute. The pool of tourists from China who like to spend big now largely consists of the country’s wealthiest elite — a small percentage of the overall population. The latest numbers available show that tourists from Mainland China spent $42 billion abroad in 2009, with more than $17 billion of that spent in Hong Kong, by far the most popular shopping destination for wealthy Chinese tourists. <wwd.com/business-news>

Hedgeye Retail’s Take:  China’s growing wealth has been a windfall for retailers with exposure to Hong Kong, particularly luxury watch companies, which have reflected the surge in demand – a trend we expect to continue at least for the near-term.

 

U.K. Retailers Rush To Develop and Harness Power of E-Commerce - U.K. Retailers are developing more advanced Web sites and own-brand products to drive profit as they seek to stave off “zero growth” in sales in 2011. Online is “an absolute essential priority now as opposed to before when it was seen as something that was an emerging thing, not high on the list,” Ian Geddes, head retail partner at Deloitte, said in an interview at the World Retail Congress in Berlin. Stores are investing in more multichannel options, which allow shoppers to order a product online and pick it up at a store, he said. U.K. retailers are facing a “very tough” first quarter as the government’s spending cuts, unemployment, the value-added tax increase and inflation weigh on consumers’ ability to spend, the executive said. He forecasts zero growth or a slight contraction in retail sales in 2011. Retailers have been showing a renewed online push after the recession pulled their focus towards cutting costs, according to Geddes. They’re becoming more active in social networking sites such as Facebook and Twitter and adding more price comparisons and product reviews to drive sales, he said. Retailers are also using the Internet as a way to expand without having to invest in more store floor space, executives said. <bloomberg.com/news>

Hedgeye Retail’s Take: As we’ve seen here in the U.S., those companies that have been proactively investing in their e-commerce infrastructure will be at a substantial competitive advantage.

 

Scaring Up Last-Minute Halloween Sales With Shipping Offers - With fewer than five days until Halloween, online retailers are hyping shipping promotions to capture last-minute shoppers. Sites, such as CostumeCraze.com are discounting goods up to 90% and promoting sale prices on their home pages next to  shipping offers that will still get items delivered by Halloween. SpiritHalloween.com puts urgency into a home-page promotion, tagged with “The End is Near” on a tombstone next to a zombie, noting that shoppers can place Halloween orders only until 3 p.m. on Oct. 26 to ship via FedEx’s second-day air service. BuyCostumes.com offered free priority shipping for purchases of $90 or more made on Tuesday, Oct. 26, for delivery on Friday, Oct. 29. The site also offered discounts of up to 90% for costumes for adults, kids and dogs. Some merchants gave an extra push to shipping in e-mail and social media promotions. <internetretailer.com>

Hedgeye Retail’s Take: While free shipping is a key consideration for consumers, expect more of these ‘empty’ offers which present the option at unattractively high levels primarily for marketing purposes.

 


MARRIOTT ANALYST DAY PART I - AMERICAS

Marriott Americas Division Commentary + Q&A

 

 

Introduction:

  • NYC: There have been 8k net room additions of hotel rooms since 2008 & 2009, occupancies are up 7% from 1H 2009
  • Net new rooms by 2013: 669-679k from an estimated 608k at year end 2010
  • 21-28% return on invested capital over the next 3 years

Bob McCarthy – Group President of the Americas

  • Competitive advantages: Leading brands, global scale/ leverage, and culture
  • Have grown from 67,000 rooms in 1985
  • 70% of their full service room pipeline is outside of the USA
  • Room refreshes underway and estimated to be completed by 2013:
    • Full service - 153 complete:  increased RevPAR vs. index by 3.2%
    • Courtyard - 200 complete: increased RevPAR vs. index by 7.6%
    • Springhill - 49 complete:  increased RevPAR vs. index by 2.2%
    • Residence Inn – 80+ complete:  increased RevPAR vs. index by 10.5%
  • Have changed their global sales strategy by aligning sales force by customer vs. by property
  • Estimate that annual growth in travel and tourism demand will grow 7% globally from 2009-2019, and 13% in BRIC countries
  • Have 33MM MAR rewards members and account for 50% of room nights
    • Use the data to market to existing members and increase their share of wallet (e.g. when someone is close to the next level of reward status)
    • 7.4MM members are non-US based (close to 25% of which are non-European/mostly Asia)
  • Their reservation systems is the most effective distribution in the industry:
    • $27BN in room revenues
    • 45.4% sales conversion rate
    • Highest contribution to occupancy & lowest transaction costs
  • marriott.com site represents 85% of their internet reservations
    • 8th largest consumer retail site by gross sales
    • $5.6BN of sales in 2009
  • Average tenure of managers is 11 years at MAR

Tony Caputo: Executive VP of Global Development

  • Global Footprint: Impact of distribution:
    • Aims to be in all markets where their customers travel
    • Provides lender comfort
    • Economies of scale help drive owner returns
  • 60% of their developers are located internationally
  • Global footprint:
    • 493,000 rooms in NA (4.2 average hotels/owner)
    • 47,000 rooms in Asia Pacific (1.5 average hotels/owner)
    • 41,000 rooms in Europe (2 average hotels/owner)
    • 17,000 rooms in LAT/SA/Caribbean (1.5 average hotels/owner)
    • 10,000 rooms in M.E. & A (2 average hotels/owner)
  • Use their capital to fuel growth through:
    • Loans, minority equity, guarantees, key money
    • 25,000 rooms in their pipeline were enabled by some kind of MAR investment
    • Committed $400MM of capital and $80MM of guarantees to enable their pipeline
  • Average Contract Terms
    • 20-30 years
    • Rarely terminable on sale or termination at will
    • Average years remaining on contract
      • NA: 18 years (22 for Full Service)
      • Caribbean & Latam: 27 years
      • Europe: 25 years
      • ME&A: 15 years
      • Asia Pacific: 20 years
  • Expect to have 15-20 Autograph & Edition hotels open by 2010
  • Gross 80-90k pipeline opening by geography through 2013:
    • NA: 49%
    • Europe: 11%
    • Caribbean & LATAM: 9%
    • Asia Pacific: 19%
    • ME &A: 12%
  • Gross 156k pipeline opening by geography from 2006-2010E:
    • NA: 74%
    • Europe: 7%
    • Caribbean & LATAM: 4%
    • Asia Pacific: 14%
    • ME &A: 1%

Dave Grissen: President, Americas

  • Growth in NA:
    • Low supply advantage (estimate that current demand is 1% > supply)
    • Margin improvement
    • Unit growth through FS conversions and limited service franchising
  • Forecast for NA RevPAR company operated Marriott hotels:
    • 2010E:
      • Room Rev: $108
      • Other revenues: $63
      • House profit margin: $56
    • 2013 Base case (7% RevPAR):
      • Room Rev: $132
      • Other revenues: $75
      • House profit margin: $80
  • Property cost savings specific:
    • Carved off hours of operations (eliminated non-peak)
    • Downgraded to cheaper F&B sourcing
    • Cut back of the house costs
    • Renegotiated vendor contracts
  • House profit margin for 2010E (32.6%) vs. 2007
    • Rooms : -540bps
    • Wages and benefits: -1.5%
    • Food & other procurement cost leverage: 0.8%
    • Controllables: +1.4%
    • Utilities: -0.8%
    • Expect 2013 margins Base case: 38.6%
      • Rooms : +320bps
      • Wages and benefits: +0.2%
      • Food & other procurement cost leverage: 0.6%
      • Controllables: +1.5%
      • Utilities: +0.5%
  • Operating efficiencies:
    • Rolled out core standard menus
    • E-procurement
    • Centralized engineering service model (sometimes share teams with several hotels)
    • Other: housekeeping/ flatter management structure model and standardization for adding new staff/ rooms preventative maintenance
  • Autograph:
    • Anticipate 15-20 new units per year
    • 35% Membership rewards penetration in 2010
  • OTA’s penetration of their bookings have declined to 4% from 11%
  • Limited brand growth (gross) through 2013: 23-26K
    • Residence Inns: 22%
    • SpringHill: 18%
    • Fairfield: 25%
    • Courtyard: 24%
    • TownPlace: 11%
  • Total NA rooms growth projected to increase from 493,000 at 2010E to 516-520k rooms by 2013

 

Q&A

  • Gross room growth of 80-90k rooms excludes 10k rooms in Asia, related to identified preliminary deals
  • Broadly, they aren’t assuming that they will have any significant new builds for full service hotels in NA
    • There is some new capital “leaking out” for limited service higher quality brands like MAR
    • Mostly FS growth will come through conversions
  • Every room in Asia Pacific pipeline is managed, Europe is almost all franchised; in NA, the rooms are more oriented towards managed vs. franchised.
  • Issue of amenity creep in prior recoveries?
    • Lots of it is a competitive response and based on customer feedback. Right now it’s not an issue.
  • From a demand standpoint, they are still very GDP driven. They were pleasantly surprised how fast business demand came back this year.
  • Expect healthcare cost to grow barely under double digits in 2011. Will see additional pressure in 2012 & 2013. Expect 2014 to really hit them with double digits. 
  • 3 reasons why they feel great about Autograph growth:
    • Power of the system
    • Positive impact on margins by shifting to their reservation system
    • Strength of owner support structure

HOT YOUTUBE

In preparation for HOT's Q3 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HOT’s Q2 earnings release/call and subsequent conferences.

 


POST Q CONFERENCE COMMENTARY

  • “We are in the middle of a very sharp recovery from what is being described as the worst downturn in our industry since the Great Depression.”
  • “We are in the end primarily a business-to-business enterprise. 75% of our business comes from corporations. As long as the expectations for corporate profits is good, we expect that corporate travel will stay good.”
  • “If you look at where occupancies are today, they’re approaching where they were at peak levels. I think in the second quarter, for example, the occupancies in our owned hotels were within 150 basis points of absolute peak levels.”
  • “We now expect rate to be the driver of RevPAR as we go forward, that’s not atypical in the cycle. This year will be 70, 80% of our RevPAR growth coming from occupancy as we get into next year. That may shift more towards rate.”

 

YOUTUBE FROM Q2

 

Trends:

  • “For the first time in two years, total group business on the books is in positive territory.”
  • “New leads were up 20% and rates for 2010 bookings were up 16%.”
  • “North American properties saw occupancy above 71% in the quarter, with midweek levels in June for New York, Boston and Chicago over 90%. So it’s not a surprise that ADRs [average daily rates] are up roughly 5% in North America for June and July. And in London, June midweek occupancies were 98%, with Paris and Rome at 92%.”
  • “Asia continued its sharp recovery track…China once again led the charge with growth of 46%. Rate was up 7% and occupancy was up 10 points. RevPAR growth was around 14% in India, Australia and the rest of Asia, more than offsetting weakness in Thailand,  which was down 6% due to the political crisis. Even Japan, which has been sluggish to date, was up in the double digits driven by occupancy gains. This recovery trend continues into July but comparisons get a lot tougher. Between Q2 and Q3 2009, RevPAR at company-operated hotels in Asia improved by 800 basis points, and by another 1200 basis points between Q3 and Q4. So despite the strong demand trends, on a year-over-year basis the rate of growth will slow down.”
  • “RevPAR growth accelerated during the quarter from 12.6% in April to 14.6% in June as rate turned positive in May and was up 5% in June.”
  • “The tone of business remains strong in North America as we enter Q3. Short-term booking trends as well as conversations with customers about future plans remain positive. In the year, net group production is running at three times last year’s depressed levels.”

 Guidance/Forward looking commentary

  • “Over time, the real driver of cost is head count, which is flat in the quarter and will remain flat through 2011.”
  • “While Q3 business demand is strong, it is important to point out again that comparisons get a lot tougher. In 2009, RevPAR at company-operated hotels improved 700 basis points between Q2 and Q3, and by over a thousand basis points between Q3 and Q4. As such, year-over-year RevPAR revenue growth will be lower in Q3 and Q4 than it was in Q2, even as absolute levels of RevPAR continue to rise.”
  • “The trajectory of recovery is slower in Europe than in the U.S., and the weaker euro adds an additional headwind to reported numbers. As we enter Q3, we expect some benefit from the weaker euro at our owned hotels in Italy. However, the timing of Ramadan will hurt business originating from the Middle East. The euro was at 142 in Q3 last year, versus 125 to 130 today, further impacting numbers as reported in dollars.”
  • “As we enter Q3 conditions will remain challenged in the Gulf, stronger in Egypt and the rest of Africa, but Ramadan will affect August.”
  • “In Latin America, strong growth in the south and Mexico – Mexican H1N1 impact last year resulted in RevPAR up 30%. Argentina grew 44% and Brazil 32%. In Mexico business travel is recovering, but results have been hit by drug-related crime concerns. These trends remain intact as we enter Q3. This quarter we will lack the significant impact from H1N1 we saw in South America last year.”
  • “We expect the margin improvement trend to continue into the back half, with operating margins increasing 100 to 150 basis points worldwide.”
  • “SG&A will be up again in the 10 to 12% range. We made deep and what we believe are sustainable cuts in SG&A last year, and we remain determined to maintain them.”
  • “In our vacation ownership business, which is our most consumer-dependent enterprise, the tone of business is best described as sluggish. Customer propensity to tour is lower, close rates are stable, and pricing is lower due to our reductions as well as mix…With consumer confidence declining, we do not expect these trends to improve in the second half.
  • “We expect 8 to 10% local currency RevPAR growth in Q3 at company-operated hotels. Exchange rates will be a headwind, reducing dollar-reported RevPAR growth to 5 to 7%. The FX impact will remain a headwind in Q4 too. For the full year, we are raising constant-dollar RevPAR growth to 7 to 9%, 200 basis points above our prior expectations, and 6 to 8% as reported in dollars. Our full-year EBITDA expectations have also increased to a range of 815 to 845 million.”
  • “We are working on the securitization of vacation ownership receivables, market conditions are favorable, and assuming they stay that way, we should get a deal done in Q3.”
  • Q: “If I look at your guidance for the second half of the year it seems to imply RevPAR growth up in the 7% range for the fourth quarter, but EBITDA growth of kind of up 1 to 3 or 4%. Am I missing something on that?”
    • A: “There’s some comparison issues relative to last year, as you said, asset sale differences. Second, it doesn’t underestimate the impact of a significant move in FX YoY, compared to last year. We also have the SG&A incentive comp deltas from last year that we’ve talked to you about. So you put those together and it does explain a big chunk of that.”

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