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TBL: Duty Issue is Back and Better than Ever

As usual, this issue is misunderstood. When it comes up, TBL trades down, though I think the opposite should happen relative to earnings expectations.
The issue surrounding EU anti-dumping duties on Chinese and Vietnamese leather goods reared its head again last week. I’ve had more than a few inquiries given its importance to Timberland, but the bottom line is that I think this is a non-event, and would even go as far as to say that the backdrop supports a positive change over the next 12 months.

As backdrop, two years ago, the EU imposed anti-dumping duties on product imported from China and Vietnam to protect local suppliers. Given TBL’s exposure to Europe (1/3 of total), this cost the company $9-$10mm or ~100bps in EBIT margin (Big on a 5.7% base). This duty expires on October 8th, which triggers a review process that could extend the duties by upwards of one year.

The important point here is that I don’t have any duty recapture in my model, and my sense is that the Street’s models do not either. If they do, then expectations are way too low on other operating metrics.

I’d also note that the EU is under more pressure to remove these anti-dumping duties today than 2 years ago. Whether or not the duties were even necessary was a hot debate in the first place given the vast difference in quality and label for European brands vs. those made in Asia. Now – with a weaker consumer spending environment and higher inflation, consumer interest groups such as EuroCommerce, BEUC and AEDT are leading a unified push to bring said duties to an end. If this were to occur, I’d have to take up my estimates for TBL, which are already above consensus.

The Chart The Investment Bankers Didn't Focus On...

As I sit here reviewing this week's macro economic data, this chart jumps right off the page. This week, compromised groupthink obviously took over the crisis management of the entire US Financial System, but that does not mean that the economic facts underpinning it cease to exist.

This month's Industrial Production growth number moved to negative on a year over year basis (see chart). On its own, this is obviously bad. Together, with a strengthened US Dollar, this is going to get worse. US Exports will be choked off by both the slowing global economic cycle, and the relative competitiveness of the US currency versus those currencies that are in the midst of swan diving internationally.

Hank Paulson obviously didn’t have an investment process like we have here at Research Edge to foresee this local or global slowdown. The chart below actually maps his time at the Treasury since he left Goldman. He, Lloyd Blankfein, John Mack, John Thain, and Vikram Pandit can run around getting the US government to regulate their clients (banning short selling). That is only going to make this worse. It's time to regulate those who don't know how to proactively foresee economic and/or systemic risk - the investment bankers.


Who Has Your Hedge Fund's Back?

Rather than regulating themselves, "Investment Banking Inc" has decided to pull out all the stops and have their colleagues who run the US Government regulate their clients!

This is embarrassing, on many levels. The clients are going to have to the underwrite the new rules of illiquidity and volatility that the government and bulge bracket investment banks are creating.

Below is a prospectus for what that once vaunted "bulge bracket" could look like come 2009. At a minimum we'll need a new bracket that still puts clients above their own compromised P&L.

Keith McCullough & Andrew Barber
Research Edge LLC

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It’s been a glorious seven year run. Unfortunately, 2008 will prove to be the first year since 2001 when visitation to Hawaii turned negative. And it’s getting worse. Visitation fell over 10% in both June and July. August shouldn’t be much better. We’ve got more up to date hotel metric data and it is even uglier. While the hotels are trying to maintain rate, ADRs have ranged from 1% to -4% the last few weeks, occupancy is plunging. RevPAR has consistently been in the range of -6% to -16%. So what’s going on?

• It’s global this time! That’s not good.
• Stronger dollar. US no longer “on sale”.
• Aloha and ATA airlines shutting down has slammed the Hawaiian tourist economy. By far the primary manner of travel to Hawaii is via air. Hawaii has lost over 1m annual seats from east coast alone.
• The price of fuel is a dominant factor in the health of the Hawaiian tourism industry. Kelvin Bloom, President of ResortQuest Hawaii, states that Hawaii, as the most isolated land mass on the planet, is facing severe long term problems due to the current fuel crisis. “Airlines won’t fly flights that don’t yield. Las Vegas is an example of this”.
• July, traditionally one of the strongest months of the year, saw a 6.5% hit to occupancy and a decline in room rates. High-end markets such as Maui, which attracts affluent vacationers, took the steepest decline in July. Visitation from Japanese, corporate meeting groups, and honeymooners declined by 11.7%, 26.7%, and 24.2% respectively.

So who is exposed? HOT maintains 5% of its domestic hotel rooms in Hawaii. Worse, 30% of HOT’s timeshare revenue was derived in Hawaii. Timeshare is not an immaterial business for HOT, generating 25% of total company revenue. I’ve analyzed HOT’s 3 most important markets: NYC, London, and now Hawaii. Trends are getting worse in all of those markets with no signs of stability. Somehow, the sell side still believes EBITDA will grow next year. In my modest opinion, EBITDA estimates still need to come down 10-15% and EPS estimates reduced by 20-25%.

I hear crickets chirping
Hotel metrics are falling off the Hawaiian cliffs

US Market Performance: Week ended 9/19/08

Index performance:

Week Ended 9/19/08:
DowJones (0.3%), SP500 +0.3%, Nasdaq +0.6%, Russell2000 +4.6%

SEP08’ To Date:
DowJones (1.3%), SP500 (2.2%), Nasdaq (4.0%), Russell2000 +1.9%

2008 Year To Date:
DowJones (14.2%), SP500 (14.5%), Nasdaq (14.3%), Russell2000 (1.7%)


In an interview with Time, Prince Alwaleed bin Talal expressed that his hunger for US investments has abated. The focus of the interview was on financial investments but the implications were clear. The Prince’s investment portfolio is hurting, the drop in oil prices is not helping, and there are better opportunities at home in Saudi Arabia.

As you know, the Prince has been an active investor in hotel assets and companies. While not affiliated with Dubai World and other sovereign wealth funds, their fortunes are tied together to a large extent. For US investors hoping for a buyout, strategic investment, capital infusion, etc. of MGM, the hotel companies, or any other gaming/lodging company, this should be required reading.

With the dollar rising, the US is no longer “on sale”. No doubt the bad taste of their US investments is lingering in the mouths of the Sovereigns. Remember: in Feb Dubai World purchased 6.5m shares of MGM at $80 per share (the stock is now $30).

What does this equation add to: Bad investments + lower oil prices + stronger dollar. I’m pretty sure what it doesn’t equate to.

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