R3: VFC, SHOO, UA, Avatar


February 15, 2010






  • With Steve Madden stepping up late last year to rescue debt laden Betsey Johnson, it didn’t take long for the two brands launch a new line.  Shown for the first time at Fashion Week, Johnson debuted a lower priced line called “Pink Patch”.  All items will be priced below $100.  Not surprisingly the runway models wore a new line of Madden shoes which are available for a short time only on the company’s website.
  • According to Nielsen, grandparents are growing into a major consumer segment.  There are currently 69.6 million grandparents in the US with the number expected to grow 11% by 2015.  Grandparent households spend 4.4% more per year than all other households, which equates to extra spend of about $300 per year.  Oddly, grandparents with just one grandkid spend two times more than those with two to 10.  Note to parents looking to have their kid(s) spoiled. 
  • In a report out of the Financial Times Deutschland, VF Corp. is said to be vetting German outdoor company Jack Wolfskin along with two other parties. As one of Europe’s largest outdoor wear manufacturers and sales north of $400mm, the company fits several of VF’s stated acquisition criteria. However, with double-digit sales growth in each of the past seven years, we’re not sure it matches the profile of an underperforming/broken brand. 



Under Armour wins MLB Footwear License - Under Armour was named the official performance footwear supplier of Major League Baseball, effective for the upcoming 2011 season. Under Armour replaces Reebok. The multi-year agreement gives Under Armour the worldwide rights to produce and distribute the official "silhouetted batter" MLB logo on its MLB Authentic Collection baseball cleats. As part of this new licensing agreement, Under Armour will have the rights to include the MLB logo and MLB Club marks on the brand's in-store, digital, and print advertising for baseball footwear and will have a feature attraction at MLB All-Star FanFest beginning this summer in Phoenix and throughout the term of the contract. <SportsOneSource>

Hedgeye Retail’s Take: Coming on the heels of the rumored Cam Newton endorsement, UA is clearly focused on gaining more exposure “on field”.  On the other hand, it looks like Reebok remains solely focused on its women’s/toning image having let the NFL and now MLB footwear license fall into new hands.


Converse Invests in London's The 100 Club - Converse has provided a cash injection to The 100 Club, London's legendary live venue that had been facing financial difficulties and threatening to close. In a statement posted by, Converse said, "We at Converse are very excited about our new partnership with the legendary 100 Club in London. Converse's commitment to being a catalyst for creativity is at the heart of the brand and we are dedicated to championing and supporting artists, fans, the music scene, venues and the experience. <SportsOneSource>

Hedgeye Retail’s Take:  Interesting marketing opportunity which immerses Converse into the art/music scene and takes the brand far from any athletic association. 


Apparel Prices Set to Rise -Fashion’s sticker shock has only just begun. If designers think the worst of their problems with spiraling fabric prices is over, they should brace themselves for even higher costs in the next few months — just in time for spring 2012. And while rising raw materials costs are on the verge of bursting through at the retail level, there’s no sign consumers are willing to absorb all the increases that designers have had to bear. Over the last year, cotton prices have jumped 160 percent and wool prices have risen 44 percent. While the pace has slowed, prices continue to climb. The cost pressure on designers and manufacturers comes as there are signs consumers are willing to spend again — creating a delicate balance between how much firms can boost wholesale and retail prices without spooking shoppers who remain focused on value. <WWD>

Hedgeye Retail’s Take: At this point nothing related to cost pressure should be a surprise.  However, the consumer reaction and how long this will last still remains the big unknowns.  


Shoe Execs Discuss Market Drivers - Footwear executives kicked off FN Platform Monday with a discussion highlighting widespread market trends, from boots and sandals to toning and barefoot running. "In terms of fashion right now, there are so many trends colliding," said Scott Prentice, VP of sales at Calvin Klein Footwear, who spoke on the Sterne Agee-sponsored panel moderated by company analyst Sam Poser. Other speakers included Rick Ausick, president of Famous Footwear; Cliff Sifford, EVP of Shoe Carnival; Steve Silver, owner of the Next chain; Isack Fadlon, owner of Sportie LA; and Ilse Metchek, president of the California Fashion Association. Major trends for fall, the panel noted, include the enduring Americana look in the men's category, preppy boat shoes, tall boots and toning and minimal running styles. <WWD>

Hedgeye Retail’s Take: The key to a sustainable footwear trend is stated clearly above in the statement, “there are so many trends colliding”.  This is about the healthiest set up a retailer could envision given that multiple categories are working at the same time. 


NRF Forecast 6% Growth in 1H Container Imports - Import cargo volume at the nation’s major retail container ports is expected to be up 11% in February over the same month last year and the first half of 2011 should be up 6% over the same period in 2010, according to the monthly Global Port Tracker report released today by the National Retail Federation and Hackett Associates. “Strong growth in 2010 has retailers cautiously optimistic that the economic recovery is finally taking hold,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “While high unemployment and rising commodity prices are cause for concern, retailers are encouraged by six consecutive months of retail sales gains and improved consumer confidence.” U.S. ports handled 1.14 million Twenty-foot Equivalent Units in December, the latest month for which actual numbers are available. That was down 7% from November as the holiday season wound down, but up 5% from December 2009. It was the 13th month in a row to show a year-over-year improvement after December 2009 broke a 28-month streak of year-over-year declines. One TEU is one 20-foot cargo container or its equivalent. January remained steady at 1.14 million TEU, a 6% increase over January 2010. February is forecast at 1.11 million TEU, up 11% over last year, with March at 1.16, up 8%; April at 1.22 million TEU, up 7%; May at 1.3 million TEU, up 3%, and June at 1.37 million TEU, up 4%. <SportsOneSource>

Hedgeye Retail’s Take: Given the volume ramp in the 2H of 2010 as retailers looked to ‘front-run’ escalating costs, 2H growth is likely to decelerate from 6% in the 1H. Interestingly, compared to the 7-8% growth forecast for next year from the Transpacific Stabilization Agreement (TSA) representing Asian-U.S. trade, it would appear that volume through Asia is growing at a modestly faster pace.


Brazil December Retail Sales Slow  -  Brazil’s retail sales stalled in December for the first time since April after the central bank took steps to curb credit growth. Retail sales were flat in December from the previous month, the national statistics agency said in Rio de Janeiro. Analysts had been forecasting sales to grow on a seasonally-adjusted basis by 0.4 percent, according to the median forecast in a Bloomberg survey. Sales increased by 10.1 percent from a year ago and 10.9 percent in 2010, the biggest jump since the series began in 2001. Supermarket, food and beverage sales fell 0.3 percent in the month, while six of the remaining seven categories posted growth. It was the first time since April 2010, when sales declined 3.1 percent, that merchants didn’t sell more items than the previous month. <Bloomberg>

Hedgeye Retail’s Take: With food accounting for close to 20% of household income in Brazil the heightened sensitivity to food inflation relative to domestic trends are evident in December sales results.


Social Network Use in China - Marketers planning to expand into Asia-Pacific cannot ignore China. Its GDP continues to climb at more than 10% year over year, and the number of internet users in the country is increasing every day. “As penetration approaches saturation, users are adopting activities that mirror the West but remain distinctly Chinese,” said Mike Froggatt, eMarketer research analyst and author of the new report “China Social Media Marketing.” They show a particular taste for social networks. eMarketer estimates that 265 million internet users in China will use social networks at least monthly this year, a 28% increase over 2010. By 2015 China will boast 488 million social network users. <emarketer>

Hedgeye Retail’s Take: No comment on the “Pimp up my avatar” interest, but the fact that following brands is the second most common activity by Chinese consumers is worth noting for retailers that are still cutting their teeth on this new channel domestically.


R3: VFC, SHOO, UA, Avatar - R3 2 15 11




MAR 4Q2010 conference call notes 





Timeshare spin-off  

  • "Marriott International expects to spin off its timeshare operations and development business as a new independent company through a special tax-free dividend to Marriott International shareholders in late 2011."
  • "The new company will focus on the timeshare business as the exclusive developer and operator of timeshare, fractional and related products under the Marriott brand and the exclusive developer of fractional and related products under the Ritz-Carlton brand. After the split, Marriott International will concentrate on the lodging management and franchise business. Marriott will also receive franchise fees from the timeshare company’s use of the Marriott and Ritz-Carlton brands."
  • "The new timeshare company will be positioned to expand faster over time while Marriott International will further advance its longstanding strategy of separating real estate from management and franchise operations. With two public companies, shareholders will be able to pursue investment goals in either or both companies rather than one combined organization."
  • "After the special dividend, the Marriott family is expected to hold approximately 21 percent of the outstanding common stock of each company"

4Q results

  • The quarter was littered with numerous one time charges:
    • $84MM impairment charge related to a revenue management software investment
      • "The software is designed to manage and price group rooms and catering business at North American full-service hotels and will be a significant competitive advantage... rollout began in the fourth quarter of 2010 and the company expects it will be implemented at nearly 500 hotels by mid-2013 with more properties to follow. Marriott funded the nearly $270 million total system cost as it was developed, expecting to recover the cost from individual hotel properties over time. However, due to the significant
        impact of the recent recession on hotel owner profitability and the long-term nature of its
        relationships with its owners and franchisees, in the fourth quarter Marriott agreed to absorb a
        portion of the cost. As a result, the company recorded the $84 million impairment charge on the
        investment in the fourth quarter to reflect the expected levels of cost recovery."
    • $27MM of impairment charges related to a golf course land parcel for sale
    • $11MM reversal of a liability recorded as part of the Timeshare impairment charge in 3Q09
    • $85MM non-cash benefit in the provision of income taxes resulting from an IRS settlement related to the treatment of funds received from foreign subsidiaries
  • Comparable systemwide WW RevPAR of 8.1% came in a touch above the high end of company guidance
  • “We were also encouraged by trends in our North American group business. Fourth quarter catering revenue for the Marriott Hotels & Resorts brand increased 4 percent and group room revenue rose 3 percent. Near term group bookings for that brand are also picking up. Revenue for group rooms booked in the 2010 fourth quarter for stays in 2011 increased 21 percent year over-year, including 11 percent higher room rates."
  • 35 new properties (8,571 rooms) were added to MAR's system while 8 properties (1,973) exited the system

2011 outlook

  • “While 2010 was a terrific year for the company, we are even more optimistic and enthusiastic about the future. Demand and pricing continue to strengthen....With continuing room rate momentum, premier service quality, and global expansion, we expect an outstanding 2011.”
    • WW systemwide REVPAR: +6-8%
    • ~35,000 room additions to the system
  • 1Q11:
    • Comparable systemwide RevPAR: 6-8% in NA, 9-11% Internationally, 7-9% WW
    • Fee Revenue: $280-$290MM
    • Owned, leased, corporate housing & other, net of direct expenses: $20-$25MM
    • G&A: $155-$160MM
    • Gains: $5MM
    • Net interest expense: $35MM
    • Equity in earnings (losses): -$5MM
    • EPS: $0.24-$0.28
    • Timeshare contract sales: $140-$150MM
    • Timeshare sales and segment revenues, net of direct expenses: $35-$40MM
    • Interest expense associated with securitized notes: $20-$25MM
  • 2011 (doesn't assume spin-off occurs in 2011):
    • Comparable systemwide RevPAR: 6-8% WW
    • Fee Revenue: $1,310-$1,340MM
    • Owned, leased, corporate housing & other, net of direct expenses: $115-$125MM
    • G&A: $690-$700MM
    • Gains: $10MM
    • Net interest expense: $150MM
    • Equity in earnings (losses): -$10MM
    • EPS: $1.35-$1.45
    • Tax rate: 34%
    • Timeshare contract sales: Flat with 2010
    • Timeshare sales and segment revenues, net of direct expenses: $200-$210MM


  • 2010 was a stellar year for MAR. They resumed share repurchased in the 4th Q
  • The spin-off of the timeshare platform is a way for the business to grow faster. They believe that the two businesses appeal to different investors.
    • Probably because their existing shareholders wouldn't be thrilled for them to grow their timeshare business and less so because there are people that love the timeshare business (at least not public investors)
    • While the business is still rich with inventory, there will be good investment opportunities that they would like to pursue
    • New company will have exclusive rights to the Marriott and Ritz Carlton name - for which they will pay MAR a franchisee fee. However, they will be free to pursue additional brands.
    • Don't expect the timeshare company to be investment grade in the near-term, they do expect to continue to securitize notes as a source of capital and funding
  • Continue to press retail rates higher. Nearly 90% of their hotels have raised rates in the 4Q.
  • They are 2/3rds of the way done with corporate rate negotiations with rates up in the high single digit range and their customers tell them that they will travel more in 2011
  • 35% of their pipeline rooms are under construction and nearly 20% are expecting conversion
  • For timeshare, lower rental income will depress results in the 1Q but should improve going forward
  • Assume $500-$700MM of capex in 2011
    • $50MM of maintenance
    • most of the guided amount is already committed
    • Fairfield rollout in India and Brazil (10's of MM's of dollars)
  • Will return cash to shareholders if opportunities do not present themselves...most likely through share repurchase
  • Form 10 with the new deal details will come out late in the 2Q2011
  • Acquired Seville in Miami and Burners in London which will be converted to Edition - those were the 2 largest investments they made in 2010
  • As they expand more internationally they need to invest more in infrastructure (service centers and overhead)
  • Will need an IRS letter ruling but are confident that they will get it.
  • SG&A split for timeshare is in the schedules.  New company will obviously need additional overhead to run as an independent public company
  • Timeshare throws off about $200MM of FCF and they have a long runway of inventory until they decide to accelerate growth
    • Warehouse facility to fund notes in btw securitizations
    • R/C
    • Securitizations
    • Point program will help them match development spend with cash flow. Expect to be FCF positive for a few years.
  • Marriott International will generate a lot of cash but it is not their goal to become debt free.  They will likely continue to put investment grade leverage on the business
  • Will the finance income be impacted?
    • Don't expect to have a material impact there
    • That can certainly be a risk if the new entity has a higher borrowing cost. However, it shouldn't manifest until growth accelerates.
  • Expect group business to be up about 10% YoY in 2010.  Group vs. transient mix - Marriott brand would be about 40% in 2011.  2/3rds of their group business was on the books already at YE 2010 for 2011.
  • Don't want to give people the impression that they are low-balling with their 2011 guidance.
  • Doesn't necessarily think that limited service will continue to grow faster than full service.
  • They are not restricted to buyback stock prior to the F-10 since they have already announced it
  • is their cheapest distribution channel. Beyond that they are happy to sell rooms in any way that their customers want to buy them
  • Some OTA negotiations will start later this year
  • The health of the new company is a consideration of setting fees for MAR. Plus they want their incentives to be aligned.
  • HPT negotiations are going well but its premature to comment on it yet.  Nothing in the guidance as to how that will get resolved.


In-line quarter, so so guidance


Adjusted for $6MM of acquisition related expenses, HST would have reported $296MM of Adjusted EBITDA, in-line with consensus estimates.  Adjusted EBITDA guidance for 2011 was also in-line with consensus... not very exciting.




  • "Comparable hotel RevPAR increased 6.2%"
  • "The Company recently entered into an agreement to acquire the 1,625-room Manchester Grand Hyatt San Diego Hotel for $570 million. The transaction will be comprised of a combination of cash, including the repayment of existing loans, and the issuance by the Company of common and preferred operating partnership units. The transaction is expected to close in March 2011, and is subject to various closing conditions, including approval by the San Diego Unified Port District."
  • "The Company also expects to complete the acquisition of a portfolio of seven midscale and upscale hotels in New Zealand in February for approximately $145 million, including $80million of mortgage debt. The properties are located in cities that represent New Zealand's main commercial, political and tourist centers: Auckland, Queenstown, Christchurch and Wellington. The hotels will be operated by Accor under the ibis and Novotel brands."
  • During 2010, HST completed $114MM of repositioning and ROI expenditures:
    • "San Diego Marriott Hotel & Marina - an extensive, multi-year $190 million project to reposition and renovate the hotel including all 1,360 guest rooms, the pool and fitness center, as well as the expansion and development of new meeting space and an exhibit hall
    • Westin Kierland Resort & Spa - the development of a new 21,500 square foot ballroom and 4,500 square foot outdoor venue space
    • Miami Marriott Biscayne Bay - the renovation of the lobby and development of a three-meal restaurant, as well as the conversion of underutilized restaurant space into 3,900 square feet of meeting space."
  • Maintenance capex in 2010 totaled $195MM
  • 2011 expected investment in ROI and repositioning expenditures of approximately $290MM to $310MM, including $190MM of projects at the following properties:
    • "Sheraton New York Hotel & Towers - the complete renovation of all 1,756 rooms, as well as major mechanical upgrades to the heating and cooling system;
      • will convert some rooms to rental apartments
    • Atlanta Marriott Perimeter Center - complete repositioning of the hotel including rooms renovation, lobby enhancements, mechanical systems upgrades, parking garage and exterior enhancements;
      • room count reduction is necessitated by a condo nation proceeding which generated more than $11 million and which will be deployed to fund a material part of the renovation.
    • Chicago Marriott O'Hare - complete repositioning of the hotel including rooms renovation, new meeting space and the creation of a new great room, food and beverage platform and lobby;
    • San Diego Marriott Hotel & Marina - continuation of the extensive renovation and repositioning project begun in 2010; and,
    • Sheraton Indianapolis - renovation of rooms, lobby, fitness center, bar and restaurant, as well as the conversion of an existing tower into 129 managed apartments."
  • 2011 guidance:
    • comparable RevPAR: 6-8%
    • Operating profit margin expansion of 220-280bps
    • Comparable hotel adjusted operating profit margin expansion of 100-140bps
    • Net Income: $19-57MM
    • FFO $0.87 to $0.92 below consensus of $0.96
    • Adjusted EBITDA of $1,000MM-$1,035MM compared to consensus of $1,022MM



  •  History tells us that early cycle acquisitions are good investments
  • Reached an agreement to develop seven hotels in three major cities in India, through our Asia joint venture. We also purchased the junior tranches with the par value of approximately 64 million of a mortgage loan secured by a 1,900 room portfolio of hotels in Europe.The notes were purchased at a meaningful discount. The underlying assets are performing above expectations.
  • Banquet revenues increased over 7% as groups upgraded their spend
  • FFO would have exceeded the high end of their guidance adjusting for successful acquisition costs
  • There have been actual ADR increases and better mix with more transient room nights.  Premium and corporate rates increased 7%. 
  • Discount room nights declined by 3% in 2010
  • Full year transient demand matched 2007 but rates were 16% below peak
  • Group room nights were up more than 6%. Average rate was up slightly. Group revenues were up 6.2%. Recovery in luxury room nights leads the way.  Compared to 2007, group revenues are down 19% and corporate revenues are down 33%.
  • Still 4 points below their peak occupancy levels, although they expect going forward, ADR will be a meaningful % of RevPAR increases
  • Average rate for group bookings exceeds 2010 levels across all categories
  • Expect revenue and expense synergies on the San Diego acquisition
  • EBITDA at the Helmsely will only be in the $5MM range for 2011 during the renovation period, but once renovations are completed they expect that EBITDA will improve to low to mid $30MM range
  • 2011 guidance doesn't assume any additional acquisition not already announced
  • Expect the volume of asset sales to be light in 2011 - back half loaded but guidance doesn't assume any sales
  • FY 2011 dividend of 10-11 cents per share
  • Believe that they are in the early stages of the lodging recovery and that business travel will continue to recovery
  • Expect Atlanta RevPAR to underperform in 2011.
  • San Diego - RevPAR +16.8%. 2011 is expected to outperform
  • Chicago: 12.1% RevPAR growth despite citywide events flat YoY. ADR +5%, benefiting from positive shift in transient. Expect these hotels to outperform in 2011
  • San Fran: 11.5% RevPAR increase. Group and transient was strong. Expect this market to perform in-line with their portfolio in 2011
  • San Antonio: Expect that 2011 will outperform the portfolio
  • Hawaii: +5.2% RevPAR - more impact from renovations as ADR dropped 9%. Airline capacity continues to increase. Expect Hawaii to be one of their best markets in 2011.
  • Boston: +2.3% only due to a decrease in citywide demand and are expected to underperform in 2011
  • Phoenix: up slightly in 4Q, but is expected to outperform in 2011
  • Philadelphia: RevPAR fell 7.2%, renovation will cause them to underperform in 2011
  • Orlando had negative 2% RevPAR, expected to slightly underperform in 2011
  • European constant Euro RevPAR was up 13%, expect European JV portfolio to have 5-7% RevPAR growth in 2011
  • Unallocated costs increased 4.7% for the quarter. This increase was primarily driven by expense that are variable with revenues including credit card commissions, reward programs and cluster and shared service allocations. Utility cost increased only 1.4% and property taxes declined 8.4%.
  • RevPAR to be driven by more rate than occupancy. Expect some increase in group demand and higher quality groups. Expect unallocated costs to increase above inflation (utility and property level costs)
  • Raised $245MM under their continuous equity issuance program
  • Have the right to extend their R/C to 2012 as long as leverage is below specified levels -they are confident they will be below those levels
  • 2011 income tax levels- projecting a tax provision equivalent to a 4 cent provision. 
  • Prior to 2009 they were allowed to capitalize acquisition costs now they must expense those costs. Going forward they will not adjust EBITDA for successful acquisition costs.


  • Guidance has taken into account their renovation work and any associated disruption. They were a little surprised by the level of disruption they incurred in 4Q2010. However, they believe that the renovations will impact less in 2011
  • Delta between comparable RevPAR and total RevPAR
    • The 4 properties that they acquired are performing better than the comparable portfolio
  • San Diego Hyatt - capex plan?
    • They are still in the process of developing that. One of the towers is in need of significant renovations (completed in 1992). The other tower was completed in 2003 and doesn't need that much capex. No where as much capex as the Helmsley though
    • Think that the deal was completed at 14x EBITDA multiple on 2010 - this hotel's EBITDA did fall meaningfully from peak. On peak EBITDA, the price is sub 10x.
    • The hotel has been on the block for a while. There were a lot of interested buyers. They had looked at the hotel on and off for several years. 20% discount to replacement and the price they paid was the lowest price they've seen for the hotel over the years. Asset rallied strongly in 4Q2010 - performance wise.
  • Actual amount of their debt and equity issuance will depend on how active they are in the transaction market
  • Look for primarily UUP & Luxury in Europe and the US. Think that mid-market is a better opportunity in Asia - since that's where they believe the bulk of the demand will come from. New Zealand will be fully consolidated
  • Starwood did give them some key money for the Helmsley
  • Haven't seen any expense trends over the last 90-120 days to think differently about expenses than they have in the past
  • EBITDA from acquisition
    • Helmsley : $5MM
    • Hyatt: $30MM
    • New Zealand: $18MM
    • Hate to point out that they would have missed expectations without these acquisitions
  • They are comfortable with $200MM of cash on hand - had higher levels of cash in the past given the better access to capital now. No need to hoard cash on the balance sheet.
  • Feel fairly good about their representation in NY post acquisition - so the Intercon on the market isn't a huge priority
  • Key money isn't the only negotiating term- they also care about the ability to terminate the management contract or convert it to a franchise agreement, length of contract, structure of fees and incentives
  • Think that there are efficiencies to owning the Hyatt and the Marriott in San Diego. Think that they may be able to get better pricing, and more of the opportunities are on the revenue side
    • ie less competition...
  • Trying to reduce their representation in Atlanta or San Antonio

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Q4 was decent but not breathtaking. We don’t view the timeshare spin-off negatively but it’s hard to imagine that the multiple at this point was being held back.



While earnings were just in-line, MAR's announcement of a spin-off of its timeshare business will surely dominate investors thoughts and focus this quarter.  The timeshare business clearly is not a favorite amongst investors but it’s unclear that MAR’s multiple gets punished for it either.  We’re not sure separating the companies creates much incremental value.  The deal seems to be perceived positively though and should provide the shares a boost.  Separated, the two companies may be able to grow the timeshare business at a faster rate which would benefit MAR through fees.  That would be the primary benefit of the spin-off, in our view. 


4Q Detail

  • While MAR’s revenues came in $7MM above our estimate but reported $325MM of EBITDA which missed our mark mostly due to higher SG&A and lower timeshare results
  • Total fee revenues came in $3MM above our estimate of $386MM and $9MM above the high end of company guidance. The beat vs. our estimate was driven by higher incentive fees
    • Managed system-wide rooms grew 1.7% YoY (vs. our estimate of 1.5%)
    • Franchised system-wide rooms grew 5.6% YoY (vs. our estimate of 6.6%)
    • Base management fees were in-line with our estimate while franchise fees were $1MM lower than we estimated
    • Incentive fees were $4MM higher than our estimate
  • Owned, leased, corporate housing and other revenues of $342MM were $14MM light of our estimate but profits of $41MM (vs. guidance of $40MM) were $2MM better given the branding fees in the quarter and liability reversal related to a hotel that closed in the quarter.
    • The top line miss vs. our number seems to be related to lower F&B and other revenues which appear to have declined YoY
    • Branding fees were $10MM higher YoY; we’ll have to wait for the company to clarify whether this is a one-time increase or an on-going one.  This increase represents a 53% YoY lift at basically 100% margins so it’s very material to the results of the “Owned, leased, corporate housing, and other” business
    • There was also a one-time $4MM benefit to margins from the reversal of a liability related to a closed hotel
    • The company made no comments regarding termination fees in the quarter, but we do know that termination fees increased $12MM YoY, so we suspect that there was a nice increase in termination fees in the quarter as well.  These are also 100% margin fees.
    • Therefore, we suspect that if you strip out the branding fees and termination fees, the owned and leased business results would have been quite disappointing.
  • Timeshare sales and service revenue of $372MM was $18MM above our estimate.
    • Contract sales of $197MM were $2MM above our estimate and above the midpoint of company guidance
    • Timeshare sales and service revenue net of expenses totaled $43MM - $2MM below the low end of company guidance and $5MM below our estimate.  In our preview, we also included expected gains from note sales in our estimate of timeshare and services net results so the total miss vs. our estimate was $10MM (including the gains)

The World's Danger

This note was originally published at 8am on February 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The world is not dangerous because of those who do harm, but because of those who look at it without doing anything.”

-Albert Einstein


One of the most influential books that I have read in the last few years has been “Einstein: His Life and Universe” by Walter Isaacson. I say most influential because it fortified something within me that the best teams I played on took to battle every day on the ice. Courage.


If you are going to play this globally interconnected game of risk management at the highest level, you need to have the confidence and courage to play it with everything you’ve learned. You have to trust yourself and your process. You have to accept its weaknesses. You have to maintain opposing thoughts in your mind and remain calm.


You also have to be able to challenge accepted dogma, groupthink, and consensus when you have an opposing point of view.


Now that America’s Almighty Central Planner has laid down the Keynesian consensus, it’s time to take this puck right to the net on him and show the crowd what’s going on in this world outside of the bubbles that Ben Bernanke admits he never realizes he’s in:


To recap, Bernanke’s conclusions in his testimony before Congress yesterday were as follows:

  1. US Monetary Policy doesn’t affect Global Inflation
  2. US Inflation is benign
  3. US Dollars are “relatively attractive”

Let’s go through these in reverse order, given that’s how I’d weight the risk implied by a man with this amount of power who looks at the world right now without doing anything:


1.  US Dollar – after a +1.3% three-day recovery ahead of Bernanke’s testimony, the US Dollar Index dropped immediately following his aforementioned comments and is now down for the 6th out of the last 7 weeks. The world’s currency market votes on credibility real-time.


With the US Dollar being bearish across all 3 of our core risk management durations (TRADE, TREND, and TAIL)… and without any respect or support from the manipulator of the world’s reserve currency, I don’t see why we shouldn’t be modeling a probable scenario analysis for another US Dollar crisis (i.e. a retest of its prior lows).



2.  US Inflation – while Bernanke did point out that central banks hold more than 60% of their foreign currency reserves in US Dollars, he forgot to remind himself that “the Dollar is used in 85% of all foreign exchange transactions worldwide.” (Barry Eichengreen, “Exorbitant Privilege”)


Furthermore, there isn’t one major asset class in the world right now that implies that inflation expectations are low. Sure, the Fed’s compromised and conflicted calculation of inflation is benign, but we’re not willing to accept that as gospel. Here’s three ways to look at inflation:


A)     Bonds – US Treasury and Emerging Market bonds have been going straight down, literally, since QG2 was introduced at the beginning of November of 2010. Inflation is bad for bonds. Bernanke is implying the entire global bond market has this wrong.


B)      Stocks – Emerging Market stocks have been getting absolutely crushed since QG2 in November, 2010 and in the US stock market there’s a huge sector performance divergence embedded in the SP500 that is also inflationary. The S&P Energy Sector (XLE) is the best sector of the 9 we track for 2011 YTD at +7.51%, while the S&P Consumer Staples Sector (XLP) is the worst at +0.75% YTD. Ben, who is taking it in the margin? Bingo, the American consumer.


C)      Corporations – Yesterday on the Coca Cola conference call (a relatively large company with a global footprint) this is what management had to say about inflation - citing bills for juice, plastics, and sweeteners, they saw a 60% ramp in cost of goods sold in the October to December period. Management went on to say that they’ll need to raise prices on beverages in the US in 2011 as it faces $300-$400M in cost increases from commodities. McDonald’s, Proctor & Gamble, and Sysco Foods have had similar comments.



3.  Global Inflation – in a shining moment for his academic dogma, Bernanke blamed the highest world food prices in the history of mankind on “emerging market demand.”


All the while, almost every single Emerging Market demand signal we measure sequentially is getting hammered as Global Inflation (which is priced primarily in US Dollars) slows last year’s cyclical economic recovery. Overnight, Indian stocks traded down another -0.74% taking the BSE Sensex to down -14.9% for the YTD as concerns of Asian growth slowing continue to spread to Thailand, Philippines, and Indonesia (down -2.1%, -2.8%, and -1.3%, respectively).


Pakistan, which is the world’s 6th largest population (so we think worthy of considering in light of The Ber-nank’s accelerating emerging market demand thesis), saw import demand DROP from +29% year-over-year growth in December to +3.7% year-over-year growth in January. Since commodity inflation was raging in January (with the USD down for 6 of the last 7 weeks), we’d have liked to have Ben’s rebuttal to that…


Now do I have courage here or common sense? Does Ben Bernanke’s new world order of the world’s reserve currency having no impact on global prices make any sense to anyone who isn’t levered long the inflation trade? How about this concept of the USA decoupling from the Rest of the World? These are important questions that, sadly, our 112th Congress didn’t have the analytical competence or courage to ask…


The World’s Danger remains a US Central Planner’s academic dogma.


My immediate term support and resistance lines for the SP500 are now 1306 and 1336, respectively. At 11AM EST, our Macro team will be hosting a conference call on one of the latest bubbles perpetuated by the Federal Reserve’s policy of zero percent interest rates in perpetuity – Munis (email if you’d like to participate).


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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Delicious Privileges

“That most delicious of all privileges – spending other people’s money.”

-John Randolph


After reviewing this Disaster Deficit proposal put forth and watching the political theatre associated with delivering it from an American classroom yesterday, I re-shorted the US Dollar and sold out entirely of the 3% in US Treasury denominated Fixed Income I had left.


Since professional politicians from George Bush to Barack Obama clearly don’t have it in them to stop spending other people’s money, the only way to Govern the Government from here on in is going to have to be the old fashioned way - voting with our wallets.


The aforementioned quote came from a Congressman in Virginia (who served between 1) most commonly remembered as John Randolph of Roanoke. I am calling out his thoughts because they pertained to the constitutionality of the US government’s concentration of power. Standing up against the tyranny of central planning is not a new idea in America this morning. I’m just reminding you where we came from.


In the coming weeks I am going to focus on the history of both US monetary and fiscal policy. I’ll be drawing most specifically on a recently published book that I’m two-thirds of the way done by Barry Eichengreen titled “Exorbitant Privilege” which focuses on the history of the US Dollar, other modern day fiat currencies, and the politicization that supports them.


The idea of Delicious or “Exorbitant Privilege” shouldn’t be foreign to any human being. Depending on which part of this world that you live, you may actually call into question the US Dollar having the privilege of being the world’s most recent reserve currency. As Eichengreen reminds us,


“This has long been a sore spot for foreigners, who see themselves as supporting American living standards and subsidizing American multinationals through the operation of this asymmetric financial system.”


Why have I been so intensely focused on how modern day fiscal and monetary policies affect the US Dollar for the past 3 years? That’s simple. Staying ahead of the big draw downs in the US Dollar’s price over the course of the last 3 years has protected my clients and firm from being long massive bubbles in US Equities (2008) and US Treasuries (2010).


Until the huge correlation risk to what the US Dollar Index does every day burns off (and, God willing, it eventually will), I won’t stop weighing the US Dollar as the #1 factor in my 27-factor global macro risk management model.


Unlike whatever models Greenspan and Bernanke have been using for the last 10 years, mine has had some credibility in calling out big Global Macro risks before they become consensus. We introduced the Hedgeye Macro Theme of Global Inflation Accelerating in October of 2010 – today the #1 headline at one of the world’s key lagging economic indicators, The New York Times, is “Companies Raise Prices As Commodity Costs Jump.”


Having authored the inflation theme 5 months ago, I think we have as good a shot as the next Thunder Bay Bear to call a rollover in inflation – or to appease The Ber-nank fans, maybe we’ll call it The Deflation of The Inflation…


Just because inflation concerns are now a global consensus doesn’t mean that they can’t remain. I think the #1 factor in determining where inflation goes from here is where the US Dollar Index goes from here.


So, to keep this globally interconnected game of Chaos Theory very simple:

  1. If the US Dollar is debauched from here, I think Global Inflation will continue to accelerate
  2. If the US Dollar is resuscitated from here, I think Global Inflation readings will decelerate

As a reminder, the way we Chaos Theorists measure risks in macro markets is on the slope. Many Big Government Interventionists don’t even know what that means. Being historians and socials scientists can indeed provide impediments to understanding mathematical thoughts.


Another way to talk about slopes, sequential rates of change, and the risk management signals embedded therein is to simplify it – so Barney Frank and John Boehner please repeat after me – what happens in macro happens on the margin… what happens in macro happens on the margin…


Good. With that trivial math lesson in hand, all we need to give America’s professional politicians are some lines and charts for the US Dollar Index:

  1. TAIL (long-term) resistance = $81.66 (that’s the line you’ll need to challenge to overcome your credibility issues)
  2. TREND (intermediate-term) resistance = $78.98 (that’s the line you’ll need to watch day-to-day during the Deficit and Debt Ceiling Debates)

Now, on the topic of the US Debt Ceiling Debate, going all the way back to that prickly little critter that American folks like John Randolph were so focused on – the US Constitution – I’d be remiss not to remind the current Treasury Secretary of the United States of America that it wasn’t until 1917 that Congress gave the US Treasury discretion to issue debt…


That’s right – from 1787 to 1917 is a fairly long time. And we’re pretty sure that the decision in 1917 didn’t have anything to do with Presidents Bush and Obama giving prime time PR speeches from our children’s classrooms to justify deficit spending. The idea behind the issuance of US Treasury debt was grounded in protecting the American people during a time of war, not in protecting government from the people.


My immediate term support and resistance lines for the SP500 are now 1318 and 1337, respectively. As the implied default risks associated with US deficit spending and debt issuance continue to be reflected in higher US Treasury Yields, we now have a ZERO percent asset allocation to UST bonds.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Delicious Privileges - ja1


Delicious Privileges - ja2

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