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“We continue to see strong demand across both business and leisure travelers. This demand fueled growth across each of our nine distinct and compelling brands. Our efforts to hold the line on costs enabled us to beat EBITDA and EPS expectations in the quarter."

- Frits van Paasschen, CEO



  • Adjusted EBITDA $262MM and EPS of $0.50 (excluding special items) vs. guidance of $245-255MM and $0.42-$0.46 and consensus of $256MM and $0.46
  • WW Systemwide SS RevPAR: 11.8% (8.2% in constant $) and SS NA RevPAR: 9.5% (8.7% in constant $)
    • In line with constant dollar guidance
  • "Excluding special items, the effective income tax rate in the second quarter of 2011 was 25.4%"
  • "International gross operating profit margins for Same-Store company-operated properties were flat, negatively impacted by political unrest in the Middle East and North Africa, as well as the earthquake in Japan. North American Same-Store company-operated gross operating profit margins increased approximately 170 basis points, driven by REVPAR increases and cost controls."
  • "Management fees, franchise fees and other income were $201 million, up $24 million, or 13.6%... Management fees increased 11.0% ...and franchise fees increased 19.5%... Excluding North Africa and Japan, management fees increased 16.1%."
  • "At June 30, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms."
  • During the second quarter of 2011, 13 new hotels and resorts (representing approximately 2,900 rooms) entered the system. Six properties (representing approximately 1,700 rooms) were removed from the system during the quarter"
  • [Owned, leased, consolidated JV]: "Second quarter results were impacted by the effect of the earthquake at the new leased St. Regis Osaka, five renovations and three asset sales."
  • "Originated contract sales of vacation ownership intervals increased 8.1% primarily due to improved sales performance from existing owner channels and increased tour flow from new buyer preview packages. The number of contracts signed increased 5.3% when compared to 2010 and the average price per vacation ownership unit sold increased 2.0% to approximately $14,800, driven by inventory mix."
  • "Selling, general, administrative and other expenses decreased 4.3%...due to lower accruals for incentive compensation and lower legal expenses, offset by a weaker dollar."
  • Capex: $51MM of maintenance and $32MM of development capital. Net investment spending on VOI & residential was $31MM
  • During 2Q, HOT "completed the sales of... Westin Gaslamp (San Diego) and W City Center (Chicago), for cash proceeds of approximately $237 million. These hotels were sold subject to long-term management contracts. Additionally ... the Company sold a consolidated joint venture hotel, the Boston Park Plaza, for cash proceeds of approximately $44 million and the buyer assumed $57 million of debt...The Company recognized an after-tax loss in discontinued operations of $18 million as a result of the sale."
  • 3Q Outlook: 
    • Adjusted EBITDA $225 - $235MM (includes impact of asset sales which reduced EBITDA by 8MM)
      • Guidance is below consensus of $240MM - The Westin Gaslamp and W Chicago were previously announced but the Boston Park Plaza announcement is new
    • SS Company Operated WW RevPAR:  7-9% in constant $ (500bps higher at current FX rates)
    • Branded SS Owned WW RevPAR:  8-10% in constant $ (700bps higher at current FX rates)
    • Fee growth of 13-15%
    • VOI and residential earnings:  Flat
    • D&A: $76MMM
    • Interest expense:  $55MM
    • Income from continuing ops: $70-78MM
    • Tax rate:  25%
    • EPS:  $0.36-$0.40 (consensus $0.37)
  • 3Q Outlook 
    • Adjusted EBITDA $975MM - $1BN
      • Unchanged from prior guidance. 4Q consensus is $293MM vs. implied guidance of $280-295MM
    • SS Company Operated WW RevPAR: 7-9% in constant $ (300bps higher at current FX rates)
    • Branded SS Owned WW RevPAR: 8-10% in constant $ (400bps higher at current FX rates)
      • 1% higher than prior guidance
    • EBITDA impact of asset sales: $20MM
    • Branded SS WW Owned Margins: 150-200bps
    • Fee growth of 11-13% (1% higher)
    • VOI and residential earnings: $130-140MM (Unchanged)
    • SG&A growth: 4-5% (unchanged)
    • D&A: $310MMM (vs. prior guidance of $320MM)
    • Interest expense: $230MM (prior guidance of $240MM)
    • Cash taxes: $80MM
    • Tax rate: 25%
    • EPS: $1.67-$1.77 ($0.07 raise)
    • Capex: $300MM for maintenance; $150MM for investment projects & JVs. VOI ex Bal Harbour: $165MM of positive cash flow
    • Closing of Bal Harbour units to commence in late 4Q11. Capex of $150MM



  • Many developers around the world are interested in investing in hotel development. Their corporate clients and affluent leisure customers are healthy.
  • Rate and occupancy are now equally contributing to RevPAR growth and expect that going forward, ADR will be more of a driver
  • Latin America was their fastest growing region.  Europe performed well despite soveriegn debt issues. Mexico is recovering. Asia Pacific grew 16% outside of Japan and Shanghai.
  • 8th quarter in a row of RevPAR index growth
  • Rates on newly booked business for 2012 are up 9% and 12% for beyond 2012
  • Business transient revenue is up 9%
  • Forsee strong rate increases for corporate rate negotiations next year and the balance of this year
  • Leisure business - 7% price increase this quarter
  • VOI:  For the first time in 4 years realized price increases.
  • Expect solid group and transient pace for the balance of 2011
  • SPG drives 50% of their occupancy in China
  • Exceeded the high end of their guidance despite the sale of 3 large assets which cost them $5MM in the quarter
    • Gaslamp was already announced and factored into their guidance
  • Core business is performing better than they expected at the beginning of the year
  • So far in July, the momentum of the second quarter is continuing. They see no change in trends so far and therefore assume that the normal RevPAR recovery will continue.
  • No change in US momentum headed into 3Q
  • No improvement in sight for the Middle East. The Gulf continues to work through oversupply issues as well. Most significant impact on their business is on incentive fees.
  • Asia is now their 2nd largest region which should double in 5 years. Demand continues to outpace supply in Asia. China ex Shanghai was up 12%.
  • Vacation ownership - default rates are back to 2007 levels.  Remain focused on cash flow generation with a securitization planned for 4Q.
  • More comfortable for the midpoint of their guidance range than the high end reflected by the Street. Their guidance for FY11 has remained unchanged despite the events in Japan and the sale of 3 assets.
  • North Africa and Japan are projected to negatively impacted management fees by $18MM for FY11. 4Q growth will be lower than in the first 3 Q's of the year.
  • 40% of their fees are earned in the US
  • Remain on track to open 70-80 hotels in 2011
  • Bal Harbour:  Plan to start closing in November. Sales pace is good - especially from Latin American buyers


  • Usually 1/3 of their group business in 2011 was booked in 2011, 1/3 was likely booked in 2010 and 1/3 was booked in the year for the year...which is typical
  • Their leverage ratios are approaching investment grade, but rating agencies are more conservative in calculating leverage. They include leases and don't give credit for cash on the balance sheet. They have $650MM of maturities next year.
  • Have no philosophical issues with returning excess cash to shareholders, it's really an issue of timing for them
  • They are signing most of their new deals in Asia and Latin America for fresh construction. North American signings have more conversions.
  • Their NA hotels will have margin improvements above 200bps, but international will be below 150bps - given the margin pressures in Latin America.  L.A. had 75bps of negative impact on the quarter's margins.
  • As time passes they do believe that there will be good ROI investment opportunities for timeshare, but the business will not get back to its prior scale
  • The group pace for 2012 continues to improve, but today it's mostly volume driven rather than rate for what's on the books. However, new business being booked is at much higher rates.
  • Approaching 60% of the value of the condos at Bal Harbour under contract ($1BN in total). Indications are that closing rates will be high.  Prices are still at pre-crisis levels.
  • M&A environment - not deep enough for a large portfolio sale. See pricing improving substantially, but it's a one's and two's market

JCP: Shorting, Again…

Keith re-shorted JCP after an analyst upgrade offered the opportunity for more downside. Hedgeye Retail remains negative on all durations (TRADE, TREND and TAIL). Too much storytelling around Ackminism obfuscating poor positioning in the face of major industry risks, and what is likely to be a very sloppy management transition – both of which should take estimates (and the stock) down before they can ultimately go up.


This afternoon, the Hedgeye Retail team will be releasing our RETAIL Black Book, JCPENNEY - WHAT ACKMANISTS ARE MISSING, following up with a conference call on Tuesday August 2.


Please contact  if you would like to receive the report and/or participate in the conference call.  


JCP: Shorting, Again… - JCP SNAG


Lower FY 2011 guidance was expected but the Q2 miss in yields showed Mediterranean weakness played a much bigger role on RCL than initially thought.



“Since our last guidance, the turmoil in the Eastern Mediterranean has caused pricing to deteriorate even further for this region. Fortunately, our other markets are performing exceptionally well and we have been able to take our cost reductions to the next level.  As a result, profitability is still growing nicely year-over-year, but these disruptions have undermined our expectations for even better performance this year. Our long-term outlook remains highly positive and, with a strengthening balance sheet and solid liquidity, we are pleased to reinstate our dividend.  It is our intention to continue paying quarterly dividends at this level or higher as our performance improves and we work toward our goal of returning to Investment Grade.”


-Richard D. Fain,  RCL chairman and CEO





2Q results

  • $0.47 EPS in-line with consensus, higher than $0.40-0.45 guidance
  • Net Yields (current currency) rose 3.8%, short of the Street's 4.8% and guidance of 5%
    • On a constant currency basis, yields rose 0.8% (Street: +1-2%)
  • Net Cruise Costs per APCD ex fuel:  +2.3%, lower than Street's +4-5%
    • On a constant currency basis, yields fell 0.1% (Street: +2%)
  • Fuel: ~$599 per metric ton

3Q guidance

  • Net yields: +5% (current)--(consensus: +7.1%); +1-2% (constant)
  • NCC: +6% (current); +4-5% (constant)
  • NCC ex fuel: +4-5% (current); +2% (constant)
  • EPS: $1.85-$1.90
  • Capacity: +6.3%
  • D&A: $175-180MM
  • Net Interest Expense: $88-93MM
  • Fuel consumption: 335k
  • % fuel hedged: 53%
  • 10% fuel price change sensitivity ex fuel options: $10MM

FY2011 guidance

  • "While most of the company’s product groups are performing at or above prior expectations, ongoing pressures from events in the Eastern Mediterranean have reduced Constant-Currency Net Yield expectations for the year by 150 bps since April."
    • Net yields: +5% (current)--(consensus: +5.5%); +2-3% (constant)
  • "Net Yields for the Mediterranean are now expected to be down approximately 4% for the year; ex Med, yields up 11% (9% on Constant basis).
  • "The company noted that with the exception of the Eastern Mediterranean, it continues to observe strong demand for its products, especially the Caribbean, Alaska and Northern Europe.  The strength of this demand (both rate and volume) reinforces that Eastern Mediterranean pricing softness this summer appears to be geopolitically related and that the economic demand for its products is strong."
  • "The company has been able to further reduce its cost outlook for the year and has reduced its Constant-Currency NCC excluding fuel by 100 bps."
    • NCC: +4% (current); +3% (constant)
    • NCC ex fuel: +3% (current); +1-2% (constant)
  • EPS:  $2.85-2.95.
  • Capacity:  +7.6%
  • D&A:  $705-710MM
  • Net Interest Expense:  $355-365MM
  • Fuel consumption:  1,319,000
  • % fuel hedged:  55%
  • 10% fuel price change sensitivity ex fuel options: $20MM

FX guidance

  • EUR: $1.45
  • GBP: $1.64


  • Accounting change in interest expense revision revises Q2 EPS to 43 cents and FY 2011 EPS guidance to $2.85-2.95.
  • Quarterly dividend of 10 cents reinstated and payable August 30
  • RC facility amended in July with capacity of $875MM, which matures in 2016. Combined with $525MM revolver, company has $1.4BN in RC facilities.
  • Drew 12-yr, $632MM unsecured financing for delivery of Celebrity Silhouette
  • Fuel expense guidance: 55% hedged in 2012 at $72 bbl, 47% hedged in 2013 at $78 bbl, 30% hedged in 2014 at $87 bbl and 20% hedged in 2015 at $88 bbl. WTI fuel options at strike prices ranging from $90 bbl to $100 bbl cover an additional 8% and 11% of estimated consumption in 2012 and 2013, respectively. 
  • "Celebrity Silhouette will initially split her time between Caribbean and European itineraries."
  • Capex guidance: $1.1BN (2011); $1.2BN (2012); $500MM (2013); $1.1MM (2014)
  • Capacity guidance: 7.6% (2011); 1.9% (2012); 2.5% (2013); 0.7% (2014)



  • Will have a very good year despite Mediterranean concerns
  • Booking volume and APD are up for the next 6 quarters
  • 2011--increased Med. itineraries the most since it was the most promising at the beginning of the year
  • Inflation pressures have not abated but good cost control in other areas keep overall costs down
  • Revisions to their interest expense – was in relation to their export credit loans.  There was a change in the timing of the payment of certain loans which required a change in the way they account for the interest on the loans.  There is no cash impact to the revision. 2009 was the first year of their mistake.

  • 2Q
    • Yields up 9% in Caribbean
    • Solid double digit growth in Alaska/Baltic regions
    • West Med: mid-single digits
    • East Med: down
      • April/May came in as expected but June close-in bookings were very weak
    • Solid pricing in NA and Europe, except Spain
  • Interest expense: 10MM higher than guidance due to new interest accounting but adjustments below the line
  • All brands showing positive trends for rest of year
  • Much deployment moved from Egpyt to Tunisia
  • 3Q/4Q: overall load factors and APDs higher YoY
  • 3Q:
    • Eastern Med. itineraries: 18% in 3Q
    • Western Med. itineraries: slightly higher yields in 3Q
    • For all other regions, strong demand (double-digit yield improvements)
  • Japan redeployment will linger until October but business is recovering
  • 2012: Slightly less than 25% booked but running ahead of a year ago; Europe also up in load factors and APD
  • Average cost of debt:  4.4%
  • 2012 average debt cost:  4.4%
  • 10 cent/Q for dividend is conservative
  • 10Q will be filed on Monday
  • Royal Caribbean brand:
    • Half deployed 50% of European ships this summer
    • Most capacity in Italy and Spain
    • 2012 deployment: shift European presence from South to North
    • Only marginal growth in Europe passengers in 2012
    • Alaska/US/Baltic environment positive in summer
    • Radiance of the Seas revitalized in June; Splendor of the Seas will be revitalized later this year
  • Celebrity brand:
    • Alaska, Bermuda, Northern Europe doing well in 2Q
    • Sailings in Eastern Med/ Holy Land difficult
    • Caribbean performing ahead of 4Q2010, 1Q 2011
    • 90% of fleet will be Solstice-class in 2012


  • Bookings slowed down in mid-May, particularly for Eastern Med. Higher YoY bookings at discounted rates in July for Eastern Med.
  • 45% of inventory will be in Med in 2011
  • FY 2011: 150 bps yield decrease due mostly to close-in bookings
  • 2012 summer pricing in Eastern Med: slightly better but too early to tell
  • 2012 itinerary breakdown: flat in Europe YoY (in terms of market share by region)
  • No capacity increase in Europe in 2012; current forward bookings better than at this time last year
  • $200-250MM maintenance capex run rate in 2012
  • No impact on investment-grade rating
  • 2011:  On-board guidance flat from previous forecast
  • North America strength: Solsticizing in Celebrity have driven strong growth
  • Western Med: yields will be higher this year
  • 2012 NCC: will continue to manage costs well
  • 2012 fuel expense: underlying bunker composition has not changed
  • Has not done any additional fuel hedges in 2011
  • Onboard spend: broadly flattish




Notable news items and price action from the restaurant space as well as our fundamental view on select names.






Initial jobless claims came in at 398k for the week ended 7/23, down 24k from the previous week’s revised number of 422k.  The four-week rolling number declined by 8.5k to 414k.


THE HBM: WEN, MCD, GMCR, EAT, PFCB, KONA - initial claims 728





Coffee was weighed down by growing inventories at European ports and assessments of crop positions in top producer Brazil improved.





Eurozone economic sentiment worsened more than expected this month.  Optimism faded in all sectors, according to the data collected by the European Commission. The European Commission Economic Sentiment Indicator has been declining since February.  The monthly index, based on a survey of businessmen and consumers across the 17-nation euro zone, fell to 103.2 in July from 105.4 in June.





Restaurants continue to underperform, confirming further a change in how these sectors trade.  For much of the past year, restaurants have been outperforming; now it seems that the space is underperforming food and beverage categories.


THE HBM: WEN, MCD, GMCR, EAT, PFCB, KONA - subsector fbr




  • WEN rated “New Buy” at Janney on accelerating same-store sales.  We wonder if the QSR industry is doing that well; MCD is also seeing strong SSS.
  • GMCR reported after the close yesterday and blew away expectations. We expect some positive flow through for the coffee space today. 



  • EAT was upgraded to “Buy” from “Hold” at Miller Tabak.  This stock has been a Hedgeye favorite for some time.
  • PFCB was cut to sector perform at RBC Capital after it put up a terrible quarter and guidance yesterday.
  • KONA is the Teflon Don of the space, at least for now.  KONA gained 7.5% on accelerating volume in a horrible tape.  We believe that there is more to come from this company in 2011 and that their remodel program will support improved trends.




Howard Penney

Managing Director


Rory Green



Initial Claims See Another Late July Distortion

Initial claims dropped 20k last week (24k post the revision to the prior week) to 398.  Breaking through the 400k line for the first time since April is a positive signal.  However, we are cautious around the timing, since late July generally sees a distortion of the seasonal adjustment related to manufacturing layoffs.  Manufacturing employees are usually furloughed for a period during the summer, and submit initial claims when furloughed.  However, the timing of these furloughs shifts by a couple of weeks, which means the Bureau of Labor Statistics' seasonal adjustment factor doesn't do a great job of capturing them.  For evidence of this, check out the typical volatility in late July (as seen in the first chart) and the similar-looking, but not identical, patterns in the NSA data in the second chart. NSA claims dropped more than 100k WoW, well outside of the average move.  


Bottom line, we would expect claims to increase back above 400-410 sometime in the next 2-3 weeks as we roll out of the seasonal distortion.  










Joshua Steiner, CFA


Allison Kaptur



TODAY’S S&P 500 SET-UP - July 28, 2011


In a market like this, where Institutional performance chasing is one of the most misunderstood long-term TAIL risks we’re observing, price levels matter – big time.  So does considering them on a multi-factor, multi-duration basis.  As we look at today’s set up for the S&P 500, the range is 18 points or -0.53% downside to 1298 and 0.85% upside to 1316.



  • The Industrials (XLI) really signaled this Tuesday; yesterday decline was a broad based confirmation that the biggest problem the US stock market faces are forward earnings expectations - not a US debt default (which didn’t move US Treasury credit risk more than a basis point all day).   From Healthcare (which we are long) to Tech yesterday, the earnings guidance was just not good - growth is slowing.  The Hedgeye models now have 5 of 9 Sectors are now Bearish TRADE and TREND (XLF, XLI, XLB, XLP, and XLV) and only 3 of 9 Sectors are bullish TRADE (XLE, XLK, XLU).





THE HEDGEYE DAILY OUTLOOK - daily sector view




  • ADVANCE/DECLINE LINE: -2561 (-1587)  
  • VOLUME: NYSE 1099.23 (+31.33%)
  • VIX:  22.98 +13.59% YTD PERFORMANCE: +29.46%
  • SPX PUT/CALL RATIO: 2.92 from 1.99 (+46.90%)



UST Yields – market morons in Washington have finally busted the 2-year yield above my TRADE line of resistance (0.41% on 2s) this morning. Will it hold?  Its anybody’s guess  - what I do know is that I trust the market price is going to lead us more than a compromised politician

  • TED SPREAD: 18.17
  • 3-MONTH T-BILL YIELD: 0.08%
  • 10-Year: 3.01 from 2.99   
  • YIELD CURVE: 2.58 from 2.61


  • 8:30 a.m.: Initial jobless claims, est. 415k, prior 418k
  • 9:45 a.m.: Bloomberg Consumer Comfort, est. (-44.9), prior (-43.3)
  • 10 a.m.: Pending home sales M/m: est. -2.0%, prior 8.2%
  • 10:30 a.m.: EIA Natural Gas
  • 12:45 p.m.: Richmond Fed’s Lacker speaks in Virginia
  • 1 p.m.: U.S. to sell $29b 7-yr notes
  • 2:30 p.m.: San Francisco Fed’s Williams speaks in Utah


  • House plans to vote today on a debt-limit increase proposal that confronts unified Democratic opposition in the Senate
  • House Speaker John Boehner to hold news conference at 1:30 p.m.
  • Health-care spending to make up 20% of U.S. GDP by end of decade, up 2+ pct pts from 2009 as subsidies expand, federal auditors said.



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Record Low Rubber Stocks-to-Use Ratio May Lift Prices, RCMA Says
  • Copper May Rise as Strike, Lower Production Fuel Supply Concern
  • Wheat Advances Third Day on Speculation U.S. Yields May Decline
  • Coffee Falls on Rising Inventories in Europe; Sugar Retreats
  • Soybeans to Gain 9.2%, Trading Central Says: Technical Analysis
  • BHP’s Chile Copper Mine Declares Force Majeure Amid Strike
  • Brazil Coffee Output to Surge After Prices Rise, Rabobank Says
  • Container-Ship Plunge Signals U.S. Slowdown: Freight Markets
  • Radiation Concern Prompts Aeon to Test Beef for Cesium Level
  • India’s BJP Asks Karnataka Chief to Resign Over Mining Scam
  • LNG Heads for Three-Year High on Japan, Libya: Energy Markets
  • China Shipping Companies Lobby to Foil Vale’s Iron Ore Fleet
  • African Farmers Challenge ADM for Bigger Share of U.S. Food Aid



THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE – both Equities and Bonds are turning into proactively predictable trains wrecks. The catalysts are crystal clear (accelerating debt maturities for the majors through September), and all TREND lines have been broken/confirmed by volume/volatility studies.
  • EUROPE: Just awful. Period. With Italy crashing, Germany leads to the downside this morn and thats a very unhealthy signal; DAX = bearish TREND
  • Germany July unemployment rate +7.0% vs consensus +7.0% and prior +7.0%





  • ASIA: acts nothing like USA or Europe, because they have nothing that resembles A) Congress or B) Europig Debt - selloff was controlled










Howard Penney

Managing Director

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