In preparation for Hyatt’s Q4 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from Hyatt’s Q3 earnings call.



  • “During the third quarter, occupancy levels, as compared to the prior year, increased in over 75% of the hotels that we operate around the world. Average rates at our full-service hotels increased this quarter on a global basis. This was a continuation of rate increases that we saw internationally earlier in the year, and in North America the increase came primarily as a result of the shift in business mix from lower rated transient to higher rated transient business and increased group demand.”
  • “As a part of our strategy to recycle capital, in order to expand and increase distribution, we expect to be in the market from time to time on both the buy-side and the sell-side. As we mentioned on our last earnings call, we were exploring the sale of 11 properties, during the third quarter we sold one of those properties… at this time our best estimate is that we will sell between three and five additional hotels over the next few months. We expect to announce sales as they are closed. In terms of the remaining hotels that were a part of the group of 11 properties, it is unlikely that we will sell them in the near term.”
  • “Results in North America were negatively impacted by renovations at five owned properties”
  • “The margin [at owned hotels] improvement was largely a result of continued productivity gain and improved food and beverage profitability.”
  • “Our full-service hotels experienced a 20% increase in group room nights with essentially flat room rates compared to last year. The strength in the group business was partially a result of good turnout for association business that was on the books, as well as recently booked corporate business. Our food and beverage revenue has increased… driven by higher banquet and catering revenues as group customers increased spending in these areas. Expenditure by group customers in other areas, such as spa services, remains relatively weak.”
  • “The group revenue base for 2010 continued to improve through the third quarter and is up over 3% for the full year. In the quarter, bookings for the year were up over 60% based upon room nights and at higher rates, partially as a result of corporations booking meetings with relatively short lead times.”
  • “Our transient guest mix across different channels continued to improve as more business was realized through our own channels as opposed to third party owned websites, including discount internet channels”
  • “RevPAR in China increased approximately 50%, partially due to greater demand in Shanghai as a result of the World Expo. We experienced RevPAR growth in other Asia-Pacific region countries including Japan, Korea and Australia, between 5 and 10%. The southwest Asia region realized RevPAR growth lower than that of the other regions as RevPAR growth was still positive, was weaker in the GCC countries than in other parts of the region.”
  • “On capital expenditure, we have lowered our range to 250 to $260 million. Part of our capital expenditure relates to broad scale renovations at five of our owned hotels. Based on our estimates of displaced revenues, the fourth quarter 2010 negative impact is expected to be about 350 basis points to own and lease RevPAR and approximately $8 million of EBITDA. We estimate that during the first three quarters of 2011, the cumulative negative impact of the renovation at these five hotels could approximate between 300 to 350 basis points of RevPAR to our owned and leased segment and in the range of between 20 to $25 million of EBITDA.”
  • “Other information relating to 2010 is as follows; our estimate of depreciation and amortization expense is now slightly lower at between 275 million to 285 million, the interest expense range remains the same at between 50 to $55 million.”
  • “Our intent as we begun the [corporate rate] negotiations, is to try and seek, in any way from a mid to a high single-digit rate increase, the corporate rates are pushing back. They’re looking for a flat to a decrease. Given the uncertainty in the economy, especially in the U.S. things have lagged a little. But I think the industry is more focused in trying to get anywhere between mid to high single-digit rate increase.”
  • “Now what’s beginning to happen is because it’s an occupancy-driven recovery, we’re beginning to add staff, especially hourly staff in the hotels to keep pace with the occupancy that’s happening. We’re still tight relative to management staffing and we’ll continue to be tight on management staffing, to the extent we can. The only other thing I would say in terms of costs and the implications going forward is that we have incorporated wage inflation this year. So we are giving merit increases, we’ve continued to give merit increases as we look into 2011. Bonuses have been reinstituted, and as results delivery expectations that’s going to happen. The one uncontrollable or two uncontrollable at this point of time, are heat, energy costs, and second is healthcare cost. We try and limit the increases to the extent we can. But those are the factors we bear in mind as we think forward relative to cost management both at the hotels and in corporate.”



February 16, 2010






  • FOSL noted that while supply chain labor costs increased 15-20% in 2010, it is not expecting any significant pressure on costs in 2011.  The company continues to mix shift its components away from stainless steel (also some cost pressure) as a result of innovation.  Newness in the product line and focus on new materials will be a key mitigating factor of margin pressure.
  • Home Depot disclosed that 45% of store visitors pay a visit to before heading to their local store.  Approximately 95% of the’s content is localized to synch with market pricing and inventory for local stores.  There are approximately 200 markets or zones for which the company manages pricing.
  • In a new twist on employee retention, The Container Store boasts an exceptionally low turnover rate of less than 10% by promoting a more loving workplace environment – literally. More than 40 couples work together at the retailer, which also uses tactics like encouraging shoppers to leave notes for favorite employees while also pumping love songs throughout the store. In an industry plagued by particularly high turnover, something tells us that a higher dose of Michael Bolton in the store is not the quick fix.



Family Dollar Gets Offer From Trian - Trian Group, the private equity firm that holds a 7.9 percent stake in Family Dollar Stores Inc., is looking to buy the rest of the company and take it private for between $55 and $60 a share, valuing the retailer at about $7 billion. In a regulatory filing with the Securities and Exchange Commission, Trian, headed by Nelson Peltz, disclosed that it contacted Howard Levine, Family Dollar’s chairman and chief executive officer, on Tuesday to discuss an acquisition of the shares it doesn’t currently own. Trian said it offered Levine the opportunity to participate in the transaction as an investor and urged the company to form a committee of outside directors to consider the proposal. <WWD>

Hedgeye Retail’s Take:   Enter part 2 of Trian’s involvement which began over the summer with Trian’s view that FDO could improve its operational performance.  Clearly the 8% stakeholder is not happy with the results since then.  Interestingly we note that Trian has not historically taken companies private (let alone in a $7 bln transaction). 


Macy’s Brings in London Designer - Within U.S. fashion circles, London-based designer Kinder Aggugini is not high on the radar. “I know people don’t know me,” Aggugini said. But the profile could change starting now. On Tuesday night, he kicked off a new program at Macy’s intended to build up the chain’s Impulse contemporary departments, whereby a different designer creating exclusive items gets featured every few months. Karl Lagerfeld and two other designers will follow Aggugini, creating capsule collections selling for about two months at Macy’s this year. Exclusives from all four designers in the fourth quarter will create a unique holiday assortment. <WWD>

Hedgeye Retail’s Take:   Yet another aggressive fashion move by Macy’s to differentiate its offering and draw in a younger consumer.  Expect many more collaborations over the course of the year.


Brooks Bros' to Cater to the New Generation - Brooks Brothers wants to embrace another generation of shoppers and it’s quite evident in the fall collection.  “It’s iconic Brooks Brothers modified for today’s world,” said Lou Amendola, the brand’s chief merchandising officer, during a preview of the collection at the Brooks Bros. flagship in Manhattan. He described the strategy as refining the classics across men’s, women’s and children’s wear to broaden the audience without taking a 180-degree fashion turn. About 40 percent of the offering represents updating, with slimmer, shorter fits; softer, less corseted construction for a feminine flair, and relaxed, casual sportswear. Among the fall items: garment-dyed chinos, cargo pants, classic peacoats styled with 1818 rugby sweatshirts signifying the year Brooks Bros. was founded; lambs-wool sweaters with red trim and rugby stripes on one arm; jackets in patchwork herringbone fabrics; shorter toggle coats, and snug cable dresses cut seven inches above the knee.


Hedgeye Retail’s Take:  Clearly looking to spark growth in the heritage brand, Brooks Brothers is both contemporizing its offering as well as expanding distribution via Nordstrom.  While the classic American look has been working for a couple of years now, we note that recent runway shows suggest the trend is still very much alive.


Edward Lampert Moves In on Gap - Enigmatic financier Edward S. Lampert has moved in on Gap Inc., taking a 5.8 percent stake that he could ultimately use to agitate for changes at the specialty retailer. As of Feb. 3, Lampert, who orchestrated the combination of Sears and Kmart and serves as chairman of Sears Holdings Corp., had scooped up 35 million shares of Gap Inc. through various investment vehicles, including his ESL Investors hedge fund. Word of the investment — which was disclosed in a Securities and Exchange Commission filing late Monday — pushed shares of Gap up 6.1 percent to $22.78 Tuesday, putting the value of Lampert’s investment at just short of $800 million. About 21 million Gap shares traded hands, more than twice the usual number. Shares of Sears, on the other hand, dipped 1.2 percent to $88.24. <WWD>

Hedgeye Retail’s Take:  Agitation perhaps but the key to any major ownership changes still lies in the hands of the Fisher family.  Given that product/merchandising/marketing is not the strong point of SHLD we wonder what synergies, if any, really exist between these market share losing brands.


American Apparel Gets Third Extension - American Apparel Inc. has won itself a third extension of the deadline to show that it is in compliance with its loan agreement with Lion Capital. The Los Angeles-based manufacturer-retailer of trendy basics now has until the end of the day Thursday to show that its earnings before interest, taxes, depreciation and amortization, EBITDA, for the past 12 months is at least $20 million, as required by the Lion agreement. Failure to comply with the covenant could result in the immediate calling of its loans and a possible trip to bankruptcy court. Initially set to kick in on Jan. 31, the provision was at first extended until the end of the day Feb. 10 and then again through Feb. 14.  <WWD>

Hedgeye Retail’s Take: Border’s managed to stay around much longer than most probably expected…and so will American Apparel.  However, we do wonder what happens when prices skyrocket at retail this year on the company’s mostly cotton-based goods.


Under Armour Introduces 'Innovation Lab' - Under Armour Inc. unveiled its "Innovation Lab" on at its Tide Point headquarters in Locust Point, according to the Baltimore Business Journal. On hand for Tuesday's ribbon-cutting were CEO Kevin Plank along with Baltimore Mayor Stephanie Rawlings-Blake and other city and state officials. Georges St-Pierre, a mixed martial arts fighter endorsed by Under Armour, also attended the event.  The lab allows Under Armour to design, test, and modify new apparel and footwear without having to send the products off-site. Featuring an OptiTrack motion capture camera, environmental chamber, high speed camera, and materials testing lab, the space will test products like Under Armour's latest product, the e39.


Hedgeye Retail’s Take: It’s no surprise that just weeks after the company purchased the 400,000 sq. ft. Tide Point complex, it’s now taking steps to transform it into a corporate campus fit for a leading athletic brand. After sending executives across the country to study other innovative campus’ expect more unveilings to be forthcoming.


MoC Announces Export Incentives for Indian Products - India has announced to introduce export incentives for more than 600 products in sectors covering agriculture, chemicals, carpets, engineering, electronics and plastics, to enhance competitiveness. The country’s minister of commerce and industry Anand Sharma said that India aims to achieve export target of US $ 200 billion this year. With export growth of 25% per annum, the country’s exports will be doubled by 2014. <FashionNetAsia>

Hedgeye Retail’s Take: Incentivizing growth isn’t a novel strategy, but one that’s critical if the country expects to double exports in 4-years. For perspective, India is currently the 16th largest global exporter and getting to $400Bn would place it at around #10 – still a far cry from the top three (China, Germany, and the U.S.) that export $1.3-$1.5Tn annually.




The Macau Metro Monitor, February 16, 2011



Stanley Ho has filed a new lawsuit against Pansy Ho and Daisy Ho, a company controlled by their family, and another company controlled by Ina Chan, Ho's 3rd wife, and Lanceford Co. Ltd--the 5th defendant. 


The new writ includes the following:

  1. An order declaring that the transfer of Ho’s interest in Lanceford Co., which holds a 31.7% of closely held STDM was made without Ho's approval.
  2. Pansy and Daisy Ho “improperly and/or illegally” transferred 99.98% of Lanceford’s shares to a company they control along with their siblings and another controlled by Ina Chan.
  3. A new allegation that Pansy and Daisy exerted “undue influence” when they transferred a 4.84% stake their father owned directly in STDM to Lanceford.
  4. Injunctions to restrain the companies that hold the contested stake from selling the shares or voting on them, and for Pansy and Daisy Ho to be restrained from transferring or dealing with his holdings in any other companies, including Shun Tak Shipping Co. and Hanika Realty Co. Hanika owns at least 18.4% of ferry operator and property developed, Shun Tak Holdings Ltd. Shun Tak Shipping owns another 10.7%.

Lawrence Ho, Maise Ho, and Josie Ho are not named in the latest suit.  "Promises made by Pansy and Daisy Ho to return Lanceford Company Limited back to Dr. Ho have been broken and it would appear that they do not intend to keep to their word," Gordon Oldham, Mr. Ho's lawyer, said in a statement.



Border crossing hours between the boarder gate and Zhuhai may be extended for two more hours, after the Gongbei border expands in August, according to the Macau deputy to the National People’s Congress.  



Visitor arrivals in package tours increased by 7.8% YoY to 524,527 in December 2010.  Visitors from Mainland China (364,265), Hong Kong (35,331) and Republic of Korea (17,435) rose by 9.5%, 36.3% and 114.5% respectively, while those from Japan (21,568); Taiwan, (20,388) and Malaysia (16,473) decreased by 14.3%, 19.9% and 2.1% respectively.



1,189 new units in Singapore were sold last month, down 11% in December and nearly 40% lower than November.  But the number still came in higher than market estimates.

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Notable news items/price action over the last twenty-four hours.

  • PFCB earnings are in and provide another example of a low quality beat in casual dining.  A lower-than-expected tax rate helped EPS come in at $0.64, while a normalized rate would have seen earnings in line with expectations, at $0.57.  Guidance - rev now saying +3-4%, prior was MSD growth; lowered Pei Wei openings to 6-8 from 10-12 EPS growth the same.
  • Denny’s and BOBE reported latest-quarter results Tuesday that included negative sales trends blamed on tough winter weather that kept guests at home.  DENN reported 4Q operating revenues at $135.9m versus the Street at $142.5m..
  • BOBE reported 3Q EPS at $0.51 versus the Street at $0.63.  Management reaffirmed 2011 sales forecast of approximately $1.7bn versus the Street at $1.68bn
  • Bob Evans comps (0.5%) vs consensus +0.5%
  • Mimi's Cafe comps (3.2%) vs consensus (4.0%)
  • SBUX price target raised to $40 from $36 at Piper Jaffray.
  • GMCR was upgraded to Buy form Hold at KeyBanc based on a potential partnership with Starbucks and stronger Q1 brewer sales.
  • CMG was downgraded to Neutral from Outperform at Cowen and Company. 
  • Recent news that travel and tourism spending has increased is positive news for the restaurant industry.
  • GMCR got a mention yesterday in an interview with SAC’s Steve Cohen.  GMCR is one of his top picks.
  • JACK has been performing well of late.  Yesterday the stock gained 0.6% on accelerating volume. 



Howard Penney

Managing Director

CHART OF THE DAY: The Consumer is at the Tipping Point



CHART OF THE DAY: The Consumer is at the Tipping Point -  chart

Excessive Storytelling

“Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur.”

-Malcolm Gladwell


Epidemic might be the right word to describe the environment in the USA that has ensued since Bernanke’s speech in Jackson Hole and the 96.3% move in the S&P 500 since March 2009.  There are many corners of the world that are looking at the USA and the policies of the Federal Reserve and clearly believe that we are pouring gasoline on a blazing hot fire.


The past month’s protests in North Africa and the Middle East were partly linked to surging agriculture costs and according to the UN, countries in Latin America are most at risk of food riots as prices continue to head higher.  According to the World Bank, rising global food prices have pushed 44 million more people into “extreme” poverty in developing countries since June.  Yet the USA and the S&P 500 continue to power forward like they are impervious to these issues. 


Not so fast….  The question is when, not if, Chariman Bernanke will pull the punch bowl on the current liquidity binge.  The increased civil unrest that ensues around the world will continue to put incremental pressure on him to alter the current policy.  The scary part is he needs to do it sooner rather than later and chances are it’s going to happen at exactly the wrong time.


Just by chance, what if we get a hint of a FED exit strategy today at 2 pm just as the “storytelling” is reaching a feverish pitch?  I’m hearing people talk about stocks, saying, “This time it’s different!”  Or how about this one, “margins don’t matter!” Or better yet, “consumer companies are impervious to rising input costs!” Over the next 12-months we are going to be able to produce some serious You-Tube moments that will last a lifetime. 


Of course margins don’t matter – until they do.  Consumer companies are impervious to rising input costs – until they are not.  And we are at the tipping point! 


It seems like yesterday that Malcolm Gladwell published The Tipping Point: How Little Things Can Make a Big Difference.  Gladwell describes a tipping point as “the moment of critical mass, the threshold and the boiling point.”  In nearly every situation there is that moment in time when the world is ready to follow the leader or “the trend.”  Right now, that leader is Chairman of the Federal Reserve, Ben Bernanke and the trend is excess liquidity that is leading to higher inflation and higher stock prices.   


The critical element of the U.S. economy that is not benefitting from the Federal Reserve’s actions, in real terms, is the consumer.  I believe that the consumer is reaching a tipping point.  Accelerating demand is critical to maintaining profitability in an accelerating cost environment.  What we saw yesterday from the retail sales data was perhaps an indication that the consumer is beginning to slow down. 


In the face of non-confirming data, observers with a conflicted or biased view often look for any other metric, or any other narrative, to justify a prior perspective.  Revisionist versions of the truth are offered with adroit semantic maneuvering and frantic searching for the comfort of a confirming thesis. 


One narrative being promoted at the moment is that consumers are willing to pay above market for “green” products from “socially responsible” companies. This may be true to a degree, but deflecting the clear truth behind the data, be it Retail Sales or otherwise, with qualitative narratives that are entirely subjective, is not a practice I subscribe to.  If consumers see raising prices in the absence of a corresponding growth in personal disposable income, there is likely going to be a change in consumer behavior. 


As Gladwell wrote, "Ideas and products and messages and behaviors spread like viruses do.”  At present, it is clear that many ideas and messages have spread rapidly around investor circles.  Sectors of the market are trading at premium multiples largely because of the free-money policy of the Federal Reserve.  The confidence that this instills in investors seems to trump any concern about companies’ ability to control their input costs from now on.


For many companies, the cost of raw materials is rising at a faster pace than revenue and we have only just begun to see the impact on margins.  Rising costs take time to flow through to the bottom line.  Rhetoric from management teams, against all of their incentives, has been decidedly cautious with respect to their commodity cost outlook.   As we move through the balance of 2011, the squeeze on profit margins will be more pronounced than most analysts expect. 


The Empire Index' Prices Paid index, which climbed to a two-and-a-half-year high of 45.8, was supportive of my theory yesterday.  Quoting directly from the press release, "The prices paid index climbed to a two and-a-half-year high in February, but the measure for prices received was little changed, suggesting some pressure on profit margins."  That’s right – margins are contracting, not expanding. 


How the consumer reacts to increased inflation pressures will be the tipping point for the market.  Across a wide spectrum of the S&P 500, companies are seeing margins contract, and some are more confident than others in their ability to pass on price to customers.  A growing percentage of companies will be unable to increase price at all, or fast enough to offset margin contraction, without hurting top line trends.  The economic recovery is in its embryonic stages, unemployment remains high, and consumers are keeping a tight rein on spending.  How much inflation can they take before spending begins to suffer?


I heard some supposed experts on CNBC say that $5.00 gas will not affect consumer spending.  It’s this kind of storytelling that is sign of pure excess.


Perhaps yesterday’s Retail Sales was the first glimpse of this trend.  Retail Sales growth missed Street expectations.  The trajectory of 4Q10 sales trends cannot continue with inflation accelerating and job growth proving to be highly inadequate as an offset. 


Over the next two days we will be getting more inflation readings from the PPI and CPI.  While these two numbers are conflicted calculations, they will both point to accelerating inflation.  For proof of this trend, last night in an interview on Bloomberg, Richmond Fed President Lacker (non-voting FOMC member in 2011) said that US inflation may accelerate in H2 of 2011 as firms seek to recoup higher commodities and health care costs. 


And Joe six pack is going to roll over and say thank you very much!




Function in Disaster; finish in style


Howard Penney


Excessive Storytelling - howard11


Excessive Storytelling - howard22

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