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COULD BE A BIG BEAT FOR MAR

Still worried about Q2 industry RevPAR but MAR should beat Q4 and Q1 probably needs to go higher.

 

 

We project MAR will report Q4 Adjusted EBITDA and EPS of $363MM and $0.41. Our numbers are 8% and 13% ahead of consensus, respectively, and above company guidance of Adjusted EBITDA of $331-346MM and EPS of $0.33-$0.36.  At current valuations, some of the upside may be baked into these stocks.  This was evident when Starwood reported its results last week.  However, given the magnitude of the beat we are expecting, investors could move MAR higher.

 

We also think MAR could raise Q1 guidance.  We’re already ahead of the street for 1Q2011 but in-line for FY2011.  We continue to believe the Street is overestimating Q2 industry RevPAR.  Our research shows that the April-July period in 2010 was one of pent up demand and in terms of dollar RevPAR, was much stronger than the rest of the year.  The math shows that the comparisons during that period of 2011 will be very difficult.

 

For more details on our assumptions for Q4 please see below:

 

Details:

  • RevPAR growth of 7.4% vs. 6-8% guidance
  • Management and franchise fees of $385MM vs. guidance of $370-380MM
    • 1.5% growth in managed rooms and 6.1% growth in franchised system-wide rooms
    • 9.3% growth in base management fees to $178MM
    • 20% growth in incentive fees to $71MM
    • 14.5% growth in franchise fees
  • Owned, leased, corporate housing and other revenues of $356MM producing gross margins of $39MM compared to guidance of $40MM
    • Owned & leased room revenue up 8% to $121MM
    • 5% YoY increase in F&B & other revenues
    • $19MM of branding fees and $4MM of termination and other fees
  • $195MM of contract sales and Timeshare segment results of $48MM vs. guidance of $190-200MM of contract sales and segment results of $45-50MM
  • Other stuff:
    • $25MM of gains and other income (in-line with guidance)
    • $51MM of net interest expense (guidance of $50MM)
    • $10MM Equity loss (in-line with guidance)

WEEKLY COMMODITY MONITOR

The Superbowl may have been a good calendar catalyst for Pizza restaurants, but commodity costs ran straight up the middle against them over the last week.  Of the commodity costs we monitored, cheese prices led the way, gaining +6.4% on the week.  The week was more even for commodities overall, with beef, chicken, coffee, and sugar inflation notably slowing.  Below, I give my take on a couple of important items that made major moves this past week.

  • I would obviously be remiss not to elaborate on the move cheese prices made week-over-week and its implications for the restaurant space.   Especially for the Pizza concepts (DPZ, PZZA, Pizza Hut), it is obviously a concern that costs are continuing to rise.  Obviously contracts provide insulation from price volatility but, to the extent that those contracts are up for renegotiation, higher prices are a headwind.  Particularly for DPZ, facing a difficult compare in the first quarter of 2011, this is a factor to keep a close eye on.

WEEKLY COMMODITY MONITOR - cheese

  • Wheat prices are obviously important for many restaurant companies and they rose 4.6% week-over-week.  News of countries building grain inventories as a reaction to food inflation and possible droughts impacting wheat crops in China drove prices higher recently.  PNRA expects wheat costs for 2011 to be roughly flat versus 2010, as the company currently has nearly 75% of its wheat costs locked in for 2011, modestly below the 2010 price.   Looking at the chart below, it is clear that the company is hoping that the easier comps, from a wheat cost perspective, offer them some relief.  If prices go higher, wheat could cause some margin pressure for PNRA in 2H11.

WEEKLY COMMODITY MONITOR - wheat

  • Chicken Wing prices declined 5.8% week-over-week.  BWLD continues to enjoy chicken wing price favorability.

WEEKLY COMMODITY MONITOR - chicken wing

 

WEEKLY COMMODITY MONITOR - commodities

 

Howard Penney

Managing Director



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Nike: Our Take on Mgmt Chgs

Nike is losing some good people here. But the reality is that these changes are probably needed, and set the stage for a step-up in acquisition activity. 

 

First off, Nike has 35,000 employees globally. I'd challenge anyone (even many inside Nike) to even attempt to draw an organization table. It can't be done. It was hard enough when Nike was aligned by Region and by Product (i.e. US Footwear, Asian Apparel, etc...). But now it is aligned by Region, Product AND most importantly, by category (basketball, running, fitness, etc...). This is basically a 3-D matrix that is extraordinarily difficult to manage.

 

With that as a backdrop, let's look at the management changes and gage the impact. There are two that raised an eyebrow.

 

1) Eunan McLaughlin: Eunan has definitely put in his time and has been the consummate journeyman inside Nike. He started off as a sales rep in Europe in 1999, but by 2001 he was the country manager for Asia. In other words he was one of the key leaders in building up Chinese infrastructure. Then he became head of Europe in 2004, and ultimately came to the US to head up the affiliates in 2009. That last move, however, was probably not his first choice. He was in his element when running Europe and immersed in the world of growing the business with a particular emphasis on football.  Coming to the US to run a portfolio of brands including Converse, Cole Haan and Hurley was probably a step down.

 

2) Roger Wyett: Roger’s background is very circular, but oddly enough, it works in this context. He joined Nike in 1994, working his way up to head of Global Product Creation. After 6-years he left Nike for Disney where he headed up Global Apparel, Footwear and Accessories. Then he returned to Nike in 2005 to be President and COO of Hurley International -- yes, a business that's a fraction of the size he oversaw at Disney. Then in 2006 he became head of global apparel after Mindy Grossman left the company. About 18 months later, he became CEO of Hurley International (again). Now he's moving over to run the affiliates?  

 

While the affiliate brands are often view by the Street as the ugly red-headed stepchild -- keep in mind that Nike's most profitable business (Converse) falls under that banner. Also keep in mind that Nike is planning to step up acquisition activity this year. This role reports directly to Mark Parker, and Mark puts heavy emphasis on innovation. Roger has proven his ability to do this during his early days at Nike, then at Disney, and then again at Hurley. Not so when heading the behemoth $4bn apparel business for the Nike brand. I guess 3 out of 4 is good enough.

 

3) The most predictable response by the Street will be to an overwhelmingly positive reaction to Jan Singer's appointment as head of Global Apparel. It is warranted. Jan is good, and her stock has been on the rise at Nike. She's also had exposure to many investors over the past year. Jill Stanton is definitely a loss. But Wall Street does not really know her well enough to focus on her departure.

 

 

The bottom line here is that Parker put a design and innovation-focused manager (Wyett) in charge of a) a place where it's needed, and b) a place where acquired brands will need to quickly cross-fertilize with the rest of Nike. The other moves have their puts and takes, but they all still report to Eric Sprunk, who is the Mac Daddy of product inside Nike. He's not going anywhere but up.


Blue Jeans Blues Clues

The third largest denim fabric manufacturer (and major textile conglomerate) Arvind Mills reported a couple of weeks ago. Below we include some relevant data points comparing the company’s textile results over the past two quarters as well as comments from the company’s chairman on the pricing environment. Arvind’s large customers include Wal-Mart and Gap Inc to name a few.

 

Q&A with Sanjay Lalbhai, Chairman and Managing Director of Arvind via CNBC-TV18:

 

When we spoke to a couple of textile players last, they indicated that because of the surge in cotton prices there is a shift that many of the makers are doing to polyester and they are increasing the production units there, are you doing anything of that sort and is the gap increasing between cotton and polyester?

 

The gap is increasing, we have a large range of polyester denims which is growing rapidly but there is a large portion of our business which is cotton and it's very difficult to move it into polyester because this is high-end cotton. We do believe that even with high prices in cotton, these prices have been absorbed and expected in the US and European markets and also the Indian market. And we believe these prices are sustainable now that the consumers have also accepted them and now all the buyers have also accepted them. So unless the prices further go up dramatically there should not be any reason for worry.

 

How is FY12 shaping up, now that you have turned around your operations effectively in FY11 – FY12 both in terms of topline and also your EBITDA level performance given that cotton prices are so high, do you think 14% kind of margins are sustainable?

 

We believe so, but you are right that cotton has touched all time highs. This kind of cotton prices have never been seen before and we have been able to pass on this costs until now but if the cotton situation gets worse then I think there could be issues whether there would be erosion in demand. Q3 Textiles (ending 12/31)

 

Q3 comments: Cotton prices have more than doubled in last one year and the prices have shot up very sharply in last 3-4 months. The company has increased selling price of its products to offset the cost push, any significant increase in cotton price could affect the margin if company is not able to pass on the cost increases.

 

Q3 Textile Summary (ending 12/31)

 

Blue Jeans Blues Clues - q3 textiles

 

Q2 Textile Summary (ending 9/30)

 

Blue Jeans Blues Clues - q2 textiles

 

Despite rising costs, potential for trading down, and increasing use of substitute materials-

 

Blue Jeans Blues Clues - denim

 

Eric Levine

Director


SMALL BUSINESS REALISTS

The person paying the bills typically has a unique perspective on things and this came through loud and clear in the most recent survey of Small Business Optimism. 

 

The Index of Small Business Optimism gained 1.5 points in January, rising to 94.1 (the best reading since the economy peaked in 2Q 2007); the index has moved sequentially higher 5 out of the last 6 months.  The average reading before the recession started was 100.

 

Given the nearly almost 100% move in the S&P 500 since the bottom on March 9th, 2009, it is interesting to note that since its low of March 31st, the Small business optimism index is only up 16.2%.  There are some interesting trends that emerge from the most recent report as it relates to how small business plans the move ahead in trying times.

 

 

CREDIT MARKETS

 

The most amazing statistic in the survey was that 92% of respondents reported that all their credit needs were met or that they were not interested in borrowing; 52% said they did not want a loan, up two points (12 percent did not answer the question) and only 3% claim that financing is their top business problem.  Washington remains obsessed with the notion that small banks will not lend money to “creditworthy” firms and that this is holding back employment and economic growth.  In this vein, the bureaucracy of D.C. persists in creating new programs to spur lending to small businesses, ignoring the fact that small business owners, for the most part, do not want a loan.  

Hedgeye thought - Interventionist government policy is unwanted by the very parties it is touted to be aiding.

 

 

LABOR MARKETS WEAKNESS

 

According to the survey, the average employment change per firm was -4 down from a -1 in December.  The December reading was the best reading since January of 2008 when it hit 0.  The decline in small business hiring is consistent with the most recent number from the BLS, which showed the change in nonfarm payrolls of 36,000, significantly below the consensus expectation of 146,000. 

 

Referring back to my post from 2/3/11, “HIGHLIGHTING THE RISKS TO GDP GROWTH IN 2011”, 4Q10 GDP growth was a robust 3.2%.  However, this was accomplished with very little job hiring and can be completely explained by the by the fact that manufacturing and trade are leading the recovery, industries and activities that are not labor intensive.

Hedgeye thought - The labor intensive construction industry remains in a recession.  We continue to believe that housing will remain depressed for the balance of 2011.

 

 

SALES

 

The net percent of all owners, seasonally adjusted, reporting higher nominal sales over the past three months improved by five points to a net -11%, 23 points better than March 2009 (near the recession bottom) but still indicative of weak consumer activity.

Hedgeye thought - Despite what we see from the conflicted government data, the main street consumer remains challenged.

 

 

INFLATION

 

The big deflationary pressure seen in 2009 and for most of 2010 has subsided.  Seasonally adjusted, the net percent of owners raising prices was a -4, which improved from -5 in December and consistent with the 4Q readings.  Importantly, plans to raise prices rose four points to a net seasonally adjusted 19% of owners, the highest reading in 27 months.  As the theory goes, an improving economy (including rising stock prices), is likely to have more and more price hikes stick.  The intention to raise prices moved up significantly from 15% in December to 19% in January; the highest reading since 2008.

Hedgeye thought - The tipping point for the consumer will come when companies stat to raise prices to protect margins.   

 

 

EARNINGS

 

The need to raise prices is evident in the earnings trends.  Reports of positive earnings trends improved points in January, registering a net negative 28%.  More owners report that earnings are deteriorating quarter to quarter than rising. Part of this is due to price cutting and inflationary trends, but the overall environment is not supportive of employment growth. 

Hedgeye thought - There is little incentive to add incremental labor in a weak demand environment. 

 

 

CAPITAL SPENDING

 

The frequency of reported capital outlays over the past six months rose four points to 51% of all firms, higher than previous months, but historically low and far less than what is needed coming out of the Great Recession.  Small business remain in “maintenance mode”, unwilling to put new capital to work.  The percent of owners planning capital outlays in the future rose one point to 22%, but is still historically quite low.  The demand environment continues to keep the small business owner on the sidelines.

Hedgeye thought - This speaks to the lack of confidence among business owners.   

 

 

SUMMARY

 

Small business owners don’t need the free money from the Federal government.  Expectations improved, but not spending and hiring plans. Although, Main Street disinflation is dissipating, inventory is lean but the top line continues to be a struggle.  Small business need to raise prices despite a weak demand environment and are unwilling to add to their cost structure by hiring new employees.

 

SMALL BUSINESS REALISTS - nfib

 

Howard Penney

Managing Director


Early Look

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