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RCL 4Q2010 CONF CALL NOTES

1Q guidance disappointing given high expectations

 


"These improved results reflect the strong reception our new ships have received along with the solid branding our different cruise brands have enjoyed. WAVE is off to a solid start and supports our earlier confidence in meaningful pricing recovery and record financial performance in 2011."

-Richard D. Fain, chairman and chief executive officer

 

HIGHLIGHTS FROM THE RELEASE

  • "During this last quarter, extreme weather conditions impacted some of the company's voyages and impaired some of its guests' ability to make their departures. Absent these weather disruptions, Net Yields on a Constant Currency basis would have increased 4.7%, in line with previous guidance."
  • "Early "WAVE season" bookings have been encouraging and booked load factors and average per diems are ahead of same time last year."
  • "In commenting on its guidance, the company noted the potential for an increasing role of its tour operations which include Royal Celebrity Tours, Pullmantur's tour businesses and other operations on its yield and net cruise costs metrics.  Because these tour businesses have relatively low margins, this volatility has little impact on bottom line results but can cause fluctuations in the financial statistics for revenues and operating costs."
  • "Forecasted consumption is now 58% hedged for the remainder of 2011, 55% hedged in 2012, and 30% hedged in 2013."
  • "Forecasted fuel consumption per APCD is down a further 6% for 2011." 
  • Liquidity/financing update:
    • Liquidity: $1.6BN (cash and the undrawn portion revolving credit facilities)
    • "Company has $1.3 billion of committed unsecured financing on its two remaining newbuilds."
    • "During the fourth quarter of 2010 the company finalized an additional unsecured revolving credit facility in the amount of $525 million due in November, 2014. Going forward, the company anticipates maintaining two separate revolving credit facilities with staggered maturity dates to further reduce refinancing risk."
  • Capex: $1.0 billion, $1.0 billion and $350 million for 2011, 2012, and 2013 respectively. 
  • Capacity increase for 2012 of 1.2% and 2.2% for 2013
  • 1Q2011 Guidance:
    • Net Yields: 2-3% as reported, 1-2% on a constant currency; previous guidance: 2-4%
    • NCC: 1%
    • NCC (ex fuel): 2%, 1-2% on a constant currency
    • Fuel consumption: 326K metric tons; 63% hedged
    • Fuel expenses: $168MM
    • Capacity increase: 10.2%
    • D&A: 170-175MM
    • Interest expense, net: $80-85MM
    • EPS: $0.10-0.15
  • 2011 Guidance:
    • Net Yields: 4% to 6% as reported, previous guidance 4-5%
    • NCC: 2% as reported, previous guidance 0-1%
    • Fuel consumption: 1,322K metric tons; 63% hedged
    • Fuel expenses: $705MM
    • Capacity increase: 7.4%
    • D&A: 695-715MM
    • Interest expense, net: 305-325MM
    • EPS: $3.25-3.45

CONF CALL

  • Since 3Q CC, slight "upward bias" in bookings for 2011
  • Expect more than 50% of guests will be international in 2011
  • New build application in process
  • In 2012, 55% of Celebrity will comprise of Solstice hardware; 63% of Royal Caribbean International fleet will be comprised of Oasis, Freedom and Voyager class ships.
  • Still early in WAVE season, booking demand within expectations
  • 1Q 2010 had 39 cent legal settlement
  • 1Q Net yield increase--mostly from ticket revs, on-board spending flat
  • For 2011, higher marketing/selling expenses
  •  $500MM maturity in February (no capital markets needed)
  • Europe: adding 3 ships this summer
  • Close-in bookings still healthy. Newer products still selling at premium pricing.

Q & A

  • No change in 1Q outlook from 3 months ago
  • 1Q NCC: increase in guidance due to higher marketing expenses pushed into 1Q from 4Q
  • 4Q bookings were as expected
  • Forecast for FX: do not include new building projects
  • Impact on top line as ships come out of service: schedule dry docks during softer seasons
  • Weather effect for 1Q?
    •  No cruise disruptions
  • Seasonality: Alaska operations more volatile in summer; Spanish market more volatile in 3Q.
  • Not interested in selling Azamara brand or ships.
  • WAVE is key to bookings strength for 2Q and 3Q but less of an effect compared to previous years
  • 4Q 2010 Ticket revs: exactly as expected
  • 2Q trends: should show "healthy yield improvements"
  • 3Q yields will be better than 2Q
  • APD running higher than a year ago
  • 50%of revenues booked for 2011
  • Improvements: one major change on ship at end of year
  • Mexico itineraries
    • On west coast of Mexico, Allure of the Seas is on its way
  • Customer deposits growth is mainly due to pricing

Daily Oil & Gas Perspectives

From the Global Oil and Gas Patch: January 27, 2011

 

Current Long Positions in Hedgeye Virtual Portfolio……

 

Oil (etf OIL) – Initiated 1/19/11 @ $24.82

 

Current Short Positions in Hedgeye Virtual Portfolio……

 

Canadian Natural (CNQ) – Initiated 1/26/11 @ $42.65

 

Chart of the Day……

 

Daily Oil & Gas Perspectives - murph

 

Key Metrics……

 

Daily Oil & Gas Perspectives - chart

 

Must Know News……

 

MUR Misses Quarter…….Murphy (MUR) delivered a poor quarter last night, missing on EPS but beating revenue.  EPS came in at $0.91 vs. $1.01 expected; revenue was $6.51B vs. $5.62B expected.  Production in the quarter averaged 117k b/d vs. 138k b/d in 4Q09.  For guidance, the company expects EPS in 1Q11 to be in the range of $0.55 - $0.95 vs. consensus estimate of $1.47.  The company said that this estimate includes exploration expense of between $70 million and $160 million and downstream earnings of approximately $8 million during the quarter.  (Company statements)

 

Hedgeye Energy’s Take: The quarter delivered from MUR was not a strong one, as higher production and exploration costs appear to have crimp margins.  The stock is down ~12% this morning.  We will have full details on MUR’s quarter after the company’s conference call today. 

 

TNK-BP Shareholders File to Halt BP-Rosneft Deal……Russian billionaire shareholders in TNK-BP asked a London court to halt the share swap and Arctic exploration deal between BP Plc and OAO Rosneft, according to a copy of the filing read by Bloomberg News.  The application was made to a commercial court in London yesterday and a hearing is scheduled for Feb. 1, according to the filing.  BP shares fell on concern the move will reignite the disputes between the two companies that led to current BP Chief Executive Officer Robert Dudley being ousted as head of TNK-BP in 2008. TNK-BP accounts for about a quarter of BP’s production and a fifth of reserves.  (Bloomberg)

 

Hedgeye Energy’s Take: TNK-BP, the Russian BP joint venture, feels left out in the cold and is playing hard ball, and they have a case. TNK-BP have an agreement with BP that any exploration by BP in Russia must be first agreed upon by TNK-BP, since the genesis of the TNK-BP arrangement was to function as an exclusive operating (E&P) unit within Russia only. BP’s agreement with Rosneft allows BP to participate in exploration deals within Russia without TNK-BP’s approval or participation. TNK-BP wants in a piece of the action and may get it. But they will have to deal with Putin who blessed the BP Rosneft deal, which is why they filed in London. We will keep our eyes on this one, always great to see Russians go at it amongst themselves.

 

CNOOC will Increase CapEx in 2011……Top Chinese offshore oil and gas producer CNOOC Ltd (CEO) plans to raise oil and gas output in 2011, the company said in a statement on Thursday.  State-backed CNOOC said it aimed to produce 355-365 million barrels of oil equivalent (boe), compared with estimated output for 2010 of 327-329 million boe.  CNOOC said it had targeted $8.8 billion (B) in capital expenditure for 2011, compared with $7.9 billon in 2010.  (Reuters)

 

Hedgeye Energy’s Take: We think CEO could hit the above production targets, growing overall boe production ~12.5% in 2011 from 2010.  At current prices and with a spending program of $8.8 B in 2011, CEO is expected to be significantly net cash flow positive after spending and dividends in 2011, possibly doubling from 2010 to ~$10/ADR and for successive years. E arnings look set to grow ~40% in 2011 to ~$22/ADR from 2010.

 

Lou Gagliardi

 

Kevin Kaiser


R3: SuperBowl, Jordan, SHLD, and JWN

R3: REQUIRED RETAIL READING

January 27, 2010

 

 RESEARCH ANECDOTES

  • According to a survey from the Retail Advertising and Marketing association, consumer spending surrounding the SuperBowl is expected to reach $10.1 billion.  The marks the highest amount ever spent (or eaten) in the survey’s 8 year history.  The average person will spend $71.51 on SuperBowl related items, up from $64 a year ago but in line with 2007 spending levels.
  • Welcome to the collaboration party Nine West!  The JNY owned shoe brand is launching an effort called Shoelaborations, aimed at innovating the stale brand with in infusion of young design, musician, and artist talent. The first announced collaboration arrives for fall/winter ’11 with a collection designed by Giles Deacon.
  • According to a survey from Alterian, seven in ten marketing professionals either have very little to no understanding about relevant social media conversations surrounding their brands and/or few are using ad-hoc tools to monitor social media activity.  Clearly a huge opportunity with quite a bit of learning to go before social media becomes the holy grail of marketing.  With that said, the pace of change in this space is clearly something to monitor.

OUR TAKE ON OVERNIGHT NEWS

 

Kmart Shows Its Sexy Side On a photo shoot at Milk Studios, Sofia Vergara is cupping the front of a tight leopard bustier dress and tugging a little where her assets are emphasized, provocatively adjusting for the camera. She’s certainly a bombshell with a playful, flirty side to her as well — and she’s bringing it all to Kmart with her first signature fashion collection. “We’re getting so goooood,” she announces to the crowd of handlers and publicists surrounding her as they pick photos from the shoot for her publicity shots. <WWD>

Hedgeye Retail’s Take: Clearly a win in scoring one of TV’s most popular actresses of the day, but we still remain skeptical of Kmart’s efforts to use celebrities to drive incremental apparel growth.  Yes, they did it with Kathy Ireland but that was in 1993.

 

Macy's Plots Push in Contemporary With Exclusives - Macy’s is aiming to get hipper — and muscle deeper into the contemporary market. The all-American department store, which has built its fashion business primarily on traditional and better brands for the misses customer, is about to unleash a strategy to escalate its underdeveloped contemporary business and spice up its mainstream image.Contemporary departments, called Impulse, will mushroom from the current 200 Macy’s doors to 220 this year, and up to 400 over time, giving the retailer a bigger market reach than any competitor. <WWD>

Hedgeye Retail’s Take: Nothing new here as Macy’s has been forging partnerships with the likes of Madonna, Karl Lagerfeld, and Project Runway winners for the past couple of years.  Interestingly, the growth in Impulse doors is a clear sign that the retailer is regaining lost share with the younger demographic.

 

Brooks Brothers to Wholesale to Nordstrom Brooks Brothers is about to become a wholesaler.

The venerable retailer will reveal today that it has created a partnership with Nordstrom to sell its men’s and children’s wear collections beginning this fall. The Seattle-based Nordstrom will carry the Brooks Bros. merchandise in about 30 stores and online.“We know many of our customers admire and appreciate the Brooks Brothers brand for its heritage and quality,” said David Witman, Nordstrom’s general merchandise manager of men’s. “We think our customers will respond well to it.” <WWD>

Hedgeye Retail’s Take:  With the majority of brands looking to own their own distribution, this move clearly shows that privately-held Brooks Brother’s is looking to generate growth.  We suspect the JWN doors carrying the brand will be in non-overlapping markets, which bodes well for both parties.

 

Feds Seize Fake Goods in Detroit Operation Counterfeit sunglasses, Coach handbags and professional sports jerseys were among the items seized by U.S. Customs & Border Protection during a 10-week investigation in Detroit that netted $2 million in fake merchandise. Customs said Tuesday that the seizures were made at the Detroit Metro Airport from Nov. 1 through Jan. 17. <WWD>

Hedgeye Retail’s Take:   This story is becoming more commonplace as the feds and the brands seem to have found a way to more efficiently combat the illegal import of counterfeit goods.

   

Jordan Brand Launches the Air Jordan 2011 The Jordan Brand, a division of Nike, unveiled the 26th shoe in its Air Jordan line — the Air Jordan 2011 — Wednesday. It will hit shelves on Feb. 19. Co-designed by Nike’s vice president of special projects and design, Tinker Hatfield, and Jordan Brand’s senior footwear designer, Tom Luedecke, the sneaker features an interchangeable midsole technology and handcrafted patina leather, both firsts for the brand. “It’s a pretty radical departure from how basketball shoes have been built,” Luedecke said. <WWD>

Hedgeye Retail’s Take:  With over 25 designs (1 per year since 1985) the Jordan brand has become a signature product within athletic footwear. Two things to note with this year’s Jordan launch.  First, pricing remains unchanged with last year at $170 per pair.  Second, the shoe drops a week later this year on 2/19 vs. 2/13 LY. 

 

Chines Labor cost rise as inflation soars: Thirty provinces in China had raised their minimum wages by the end of 2010, according to a spokesman for the Ministry of Human Resources and Social Security, reported Global Times. In 2011, more minimum wage hikes are expected as inflation builds. Tianjin is considering raising the minimum wage by 16 percent. Jiangsu, Guangdong, the municipality of Beijing, and the municipality of Chongqing also indicated they will raise minimum wages. For Guangdong, they are considering increasing it by as much as 18.6 percent. Global Times said the debate among Chinese officials is this: improving the purchasing power of the poor or keep wage costs down for businesses. <IBtimes>

Hedgeye Retail’s Take: Surprising? No, however the magnitude of the wage increases is certainly noteworthy.  Interestingly this article hints that the margins could be somewhat protected for manufacturers if further increases are not put in place near-term.

 



Early Look

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INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH

Initial Claims Rocket Back to 454k

The headline initial claims number rose 51k WoW to 454k (50k after a 1k downward revision to last week’s data).  Rolling claims rose 16k to 427k. On a non-seasonally-adjusted basis, reported claims fell 68k WoW.  As the third chart below shows, the NSA series is following a typical seasonal pattern. This backup in claims is being partially attributed to weather-related backlogs. We would observe, however, that the backup is entirely consistent with this time of year over the past three years - see charts below. We would expect going forward, based again on the seasonality not canceled out by the government's seasonal adjustment factors, that claims will remain high and potentially rise higher over the next 3-4 weekly datapoints.

 

We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - 1

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - 2

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - 3

 

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - 4

 

Joshua Steiner, CFA

 

Allison Kaptur

 


INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH

Initial Claims Rocket Back to 454k

The headline initial claims number rose 51k WoW to 454k (50k after a 1k downward revision to last week’s data).  Rolling claims rose16k to 427k. On a non-seasonally-adjusted basis, reported claims fell 68k WoW.  As the third chart below shows, the NSA series is following a typical seasonal pattern. This backup in claims is being partially attributed to weather-related backlogs. We would observe, however, that the backup is entirely consistent with this time of year over the past three years - see charts below. We would expect going forward, based again on the seasonality not canceled out by the government's seasonal adjustment factors, that claims will remain high and potentially rise higher over the next 3-4 weekly datapoints.

 

As an aside, we continue to expect pending home sales, to be released at 10am this morning, to be a disappointment relative to consensus. For more information on that, please see our note from yesterday morning.

 

We continue to remind investors that based on our analysis of past cycles, the unemployment rate won't improve until we see claims move into the 375-400k range. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.4%, it's 11.4%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.4% actual rate as opposed to the 9.4% reported rate.

 

 INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - rolling claims

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - raw claims

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - non SA claims

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 40 bps wider than 4Q.  The current level of 279 bps is flat versus last week.

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - spreads

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL JOBLESS CLAIMS SHOULD REMAIN ELEVATED FOR NEXT MONTH - subsector perf

 

 

 

Joshua Steiner, CFA

 

Allison Kaptur


SBUX – AMAZING QUARTER

Conclusion:  A tremendous quarter for Starbucks, posting 1QFY11 EPS of $0.45 for the quarter versus expectations of $0.39.  Global comparable sales came in at 7% versus the Street at 5.5%.  The results are incredibly impressive and it seems this routine trumping of Street expectations is creating high standards.  Starbucks has beaten the consensus same-store sales number for the past 8 consecutive quarters.  Upside momentum may slow in the near-term, but I continue to think the company will live up to those high standards longer-term.

 

Starbucks registered record consolidated operating margin of 17% despite strong margin growth in the year ago quarter and rocketing coffee prices during the first quarter of fiscal 2011.  From a top line perspective, the company is maintaining healthy traffic trends with 5% of the global comparable sales result coming via transaction counts.  The company expects low-to-mid single-digit comparable store sales growth for the year.   While it would seem that comps may slow somewhat given the difficulty of the year-over-year compares, the company was facing a difficult compare in 1Q and successfully grew comps on a one-year basis.

 

With expectations ratcheted up by the soundness of this beat, investors may be somewhat disappointed that EPS and margin guidance for the year are quite conservative.  Despite the $0.45 in EPS for 1QFY11, the high end of the EPS guidance range of $1.43 to $1.47 was left unchanged.   Additionally, for the full year, SBUX is guiding to year-over-year growth in consolidated operating margins of 50-100 basis points (relative to the 340 bp increase in 1QFY11).  The commodity outlook does get more difficult as the year continues as management guided to a $0.17 per share negative commodity impact in the remaining three quarters versus a $0.03 per share hit in the first quarter.   SBUX has locked in essentially all of its coffee costs, however, so at least that uncertainty is taken care of for FY11. 

 

The international segment also posted record results with operating margins improving 720 bps YOY to 16.3%.  Management attributed this exceptional performance to its more disciplined approach around operations.  The company is sharing its best practices from the U.S. business, which is now yielding record results internationally.  Despite this strong quarterly performance, the company is still only in the early phases of its international growth potential as it still has room to refine operations and significant opportunities to expand its footprint.

 

The CPG segment is clearly an area where Starbucks sees a lot of white space for the business to expand, particularly in international markets such as India and Russia.   CEO Howard Schultz stressed the importance for Starbucks that they connect with customers through various channels.  In that sense, it seems logical that the company is looking to gain more control over that side of the business and ending its distribution agreement with Kraft is just one step in that process.   Although Starbuck’s investment in the CPG channel will take a toll on margins in FY11, transitioning to the direct model will give the company control over all things coffee in the grocery aisle and will be accretive beyond FY11.

 

I am confident that SBUX will continue to produce strong financial results, but it certainly seems implied by the reiteration of EPS guidance, and the forecast of a $0.20 cents impact on EPS from increased commodity costs, that momentum may slow somewhat in the next few quarters.  Given the level at which the company has been performing over the last few years, a slowdown from here is not catastrophic, but will perhaps bring investor expectations down slightly. 

 

While the stock could take a pause as the company feels the impact of higher commodity costs, we believe the next leg of significant growth for the company will play out subsequent to the consolidation of the distribution business from Kraft.  We will address Starbuck’s opportunity for continued upside in a detailed Black Book report due out in the coming weeks.  We feel the direction SBUX is headed is positive for the company and has positive implications for PEET; the clear market share loser is GMCR.

 

SBUX’s performance this quarter is a classic example of how well a company can execute when they focus on the core business.  Just a few years ago, management was overly focused on unit growth and the company has reaped great rewards from their focus on beverages; it is a beverage company!  Now, juxtapose SBUX’s clearly successful strategy with that of MCD, which is putting too much of an emphasis on its non-core business.  I continue to believe that issues will emerge as a result of MCD’s loss of focus on its core business over the coming quarters.

 

 

Howard Penney

Managing Director


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