Where the stock goes from here is largely a function of whether or not investors believe that this management team can walk the walk.  After some struggles in the past, it is natural that it will take time for the company to win back the Street’s trust.  I certainly carry plenty of baggage when it comes to certain stocks.


The 2% revenue growth in the first quarter of FY12 was the strongest in the past 10 quarters and 43% EPS growth was the strongest in the past five years.  Additionally, the EPS growth came on the back of 24% EPS growth in the prior year quarter.  Margins improved 80 basis points despite a decline in average check.  The company operated well in 1QFY12.  These figures are backward-looking and you’ll end up in a ditch if you drive looking backwards but the improvements management has made in terms of margin should not be discounted.  I think it is fair to say that they have exceeded the expectations of the Street and of management.  The conference call was dominated by a uniform line of questioning from the sell-side that anchored off one theme: can the company comp the upcoming comps?


If the company was not executing I could understand the why so many remain skeptical, but that is not the case.  At the beginning of calendar year of 2011 (six months into FY 2011), the consensus estimate for FY2012 was $1.60 it now stands at $1.85 following a significant upward revision following the most recently reports quarter.   


The tone of skepticism was set from the very beginning of the Q&A period with the following question: “I think a lot of investors wonder about this quarter in light of the entire year, basically people are wondering about whether the traffic and the margin gains that you're getting today, if you can sustain those as perhaps the margin comparisons and the sales comparisons get tougher as the year goes on. I oftentimes look at things in terms of the trend, but I think the comparison sometimes scare people with regard to Brinker and its story.”


The question is fair when thinking about sales trends but misses the point when thinking about margins.  The Bar &Grill space is hyper-competitive and there are a number of rival brands that have announced a lunch promotion with a $6 or thereabouts price point.  History has taught us that being proactive about price points within the industry is a far superior strategy than being reactive.  Chili’s is changing the category with this latest strategy and the proof is in the reaction of its competitors.  To get back to the question of margins, margin comparisons do indeed step up next quarter, from +187 basis points y/y in 1QFY11 to +212 basis points y/y in 2QFY12.  From there, however, as traffic comps step up, margin compares become easier with +152 basis points and -3 basis points in y/y restaurant operating margin growth in 3QFY11 and 4QFY11, respectively.   Chili’s 1QFY12 comparable-restaurant sales growth was less-than-expected at +1.7% with +1.9% of that coming from transaction growth.  Taking this into account makes us confident that the company is executing at a high level from a margin perspective.  Clearly, Chili’s share of market needs to grow for the more difficult compares, due to the successful rollout of the $6.99 lunch promotion, that come in the second half of 2HFY12. 


There are several reasons for our optimism relative to the Street (not that that even implies optimism) regarding Chili’s top-line as we progress through FY12.  Firstly, we contend that the remodels being carried out by the company will have a meaningful impact on brand perception and customer satisfaction.  During the McDonald’s reimaging tour, management explained a “halo effect” that has been observed in Australia, Europe and is expected in the U.S.; as the proportion of the system that has been renovated approaches 50%, there is a noticeable sales lift.  Chili’s is at least a few years away from that, given that it expects to be at 200-250 stores remodeled at the end of the year.  As yet, 65 are remodeled in different test-cities across the country.  For context, 250 restaurants is equal to 19% of the system store-base.  In terms of winning new guests, the remodel program, proactive and compelling price points, and the various consumer experience-boosting initiatives around labor and food prep are strong positives we see that the company is not comping. 


In conversation with management, we discussed the difficulty in comping an initiative like $6 lunch but came away confident that the back-of-the-house technological improvements are broadening the scope of dishes that the concept can produce for its customers.  In terms of launching new platforms, which management intends to do once per year, the new technology allows operators to do so with far greater ease than competing chains.  Additionally, consistency and quality has been improving with the rollout of the new kitchen equipment while improving efficiency.  The improvements management has proposed are not only helping EPS growth, but have also been embraced by franchisees.


Unless there is a significant step-up in discounting across the industry over the next twelve months, Brinker’s margin story, for us, remains intact.  We will be monitoring the national brands like Applebee’s and Olive Garden for any evidence of this.


Another question that we felt reeked of skepticism was the following: “My question relates to traffic.  I'm a little surprised that traffic has not improved at a greater pace, especially given the comments you provided about survey information you've collected. What do you think needs to change at Chili's to drive better traffic? I mean, is the advertising message an issue?"


When we consider that Knapp Track Casual Dining Guest Counts declined an average of -0.17% during the 3QCY11, Chili’s 1.9% growth seems impressive considering that it is a mature category.  The company also did not advertise on TV during three weeks of September, which hurt the top-line.


Yet more skepticism came from the following question: “… on kind of the longer term outlook and guidance and how you're going to get there.  As I've understood it in previous calls or meetings you've had, you've always talked about getting up to 3%, 4% comps in 2013, '14 and '15, to enable you to get to your 400 basis points of net margin expansion.  And I guess I'm still, I'm curious as to why you have the confidence that your comps are going to accelerate to that level.  Is it that you think that the broader industry is going to rebound with the economy, do you think your market share gains are going to accelerate, and why do you have such confidence in one of those two things happening that you've incorporated in your guidance?”


The preface to this question was mistaken, as management pointed out; the 3-4% growth target was actually a revenue goal and not comparable sales growth.  However, even if comparable restaurant sales was the metric, 1.7% this quarter, adjusted for weather and September’s advertising step-down would most likely not be very far away from the 3-4% range that the question was asking about (but that management was not guiding to).   


We have not seen the work behind the downgrade today by Sterne Agee, but pessimism around the company’s ability to continue to comp the comps is likely a factor.  We believe that the kitchen initiatives, remodels, and focused approach with which management is executing this turnaround bode well for the company’s prospects. 


As far as we are concerned, a company that is executing well at a time when skepticism on the stock is consensus is nothing to be afraid of on the long side. 


Until we get evidence that company is not on the right path, we remain positive on Brinker on the TRADE, TREND and TAIL durations.



Howard Penney

Managing Director


Rory Green










Like every other release, Starwood beat consensus estimates and put forward lackluster guidance.  While the quality of the Q was just OK, 2012 RevPAR guidance shows the health of this business.



“It is still too early to have a clear view into 2012. There are, to be sure, many clouds over the global economy. But three facts give us cautious confidence. First, in developed markets, occupancies are now at 2007 levels and at a point where rates historically have always risen. And yet, few new hotels are being built. Second, many emerging markets are continuing to see strong growth. Even if economic activity were to cool down, we see unmet demand for hotels. Third, our efforts to gain share have enabled our brands to outgrow the marketplace for more than eight quarters in a row.”


- Frits van Paasschen, CEO





  • So far, this doesn't feel anything like 2009.  Even in a lackluster economy, their leisure and corporate customers are still traveling.
  • In Europe, austerity measure have led to a slowdown in RevPAR growth, although their customers are still traveling 
  • North American RevPAR increased 8% with growth in Phoenix of 23%, Honolulu 14%, San Francisco 14, and New York 5%.  
  • Europe's RevPAR grew by 7% including Paris at 19%, Barcelona at 15% and Florence at 8%
  • Tokyo occupancies are recovering  but RevPAR was still down 12% compared to last year pre-disaster levels
  • Asia Pacific RevPAR up 16%, excluding Japan and Shanghai.  Chinese hotels excluding Shanghai: Beijing +24%, Bali up 40%, Jakarta 14% and Mumbai 11%.  
  • Latin America is booming;  RevPAR: Rio +19%, Cancun +25%, Mexico City +25% and Buenos Aires +24%
  • RevPAR for Africa and the Middle East: in countries not touched by political turmoil, RevPAR increased 6%  
  • Majority of their pipeline will open over the next 4 years
  • HOT opened 320 hotels since 2008
  • W is poised to be reach 100 hotels in a few years.  St. Regis: 17 expected to open over the next few years with 90% outside of the US
  • Since 2007 they have grow Westin 37% outside the US
  • SPG international members will soon exceed domestic members
  • Asset sales have averaged 19x since 2007
  • Vacation Ownership team returned $700MM of capital over the last few years
  • Will continue transferring to asset light. Seeing weaker demand for assets right now but they can afford to be patient.
  • Currently, their incentive fees are higher quality than 2007's since their current incentive fees are largely international and based on first dollar in
  • Occupancies are at levels now where ADRs have typically risen, which is why they are looking for double digit corporate rate increases.
  • Expect that SG&A will only grow 2-3%/year in 2012 from 2010 
  • Will step up investments in technology and systems which should help them gain share and reinvest in their asset base to keep their assets fresh
  • Transient RevPAR grew 9% with group RevPAR up 7% in 3Q. Secondary indicators like leads and cancellations also remain positive.   
  • 90% of group business is already on the books for 2011
  • Transient booking momentum remains strong and are not seeing any change in trends in 4Q
  • Projecting that Q4 RevPAR growth in North America will remain generally in-line with Q3. Closely watching Canada which is showing some signs of softness partially due to the strong Canadian dollar.  
  • Didn't see the negative impact from European austerity measures in their RevPAR in 3Q. Have seem some impact/ slowdown from economy in September and therefore projecting RevPAR growth of 3-4% in the 4Q. 
  • Rate of RevPAR decline in ME&A moderated in 3Q. YoY fee growth comparisons will suffer in 4Q - as they will not earn any incentive fees.  In total our 2011 fees in N. Africa will be down $10MM-  in-line with prior estimates
  • Asia continued to power along in 3Q, India was soft.  Japan is slowly recovering - FY impact of Japan remains at $20MM as previously estimated.  Expect a small sequential decline in Asia RevPAR in Q4.
  • Latin America will grow double digits in 4Q
  • Hope to complete a securitization in 4Q and if they do they will generate over $200MM from VOI in 2011.
  • 4Q EBITDA estimates was negatively impacted by $4-5MM due to a strenghening of the dollar.  All EBITDA in Q4 will be negatively impacted by approximately 8 million versus last year due to renovations and pre-opening costs at our new St.Regis Bal Harbour.
  • High end of their RevPAR range in 2012 assumes a continuation of current trends while the low end assumes low GDP and almost all growth from their fee business since owned hotels are unlikely to have any EBITDA growth at 4% RevPAR growth.  They are well prepared from a liquidity and balance sheet standpoint should the worst case scenario play out
  • Will have some major renovation projects scheduled for next year:
    • Will shut down Gritti Palace in Venice and Maria Cristina in Spain
    • Major refurbishment of Sheraton Rio 
    • Shut down two hotels to convert to Alofts
  • Have hedged Euro risk (50%) for 2012
  • Have been in contact with buyers at Bal Harbour and expect that closings will proceeds.  Will provide an update in February and will clearly separate the Bal Harbour impact on results so that investors can track core earnings
  • Anticipate generating almost $1BN of cash from selling condos.  Sales in 2011 have been robust.  Have received almost 50% deposits on 2011 sales.  Expectations from the impact of sales remain unchanged from what they laid out on their last investor day.  Average price per-square-foot on units under contract exceed $1,300.
  • Will shortly announce their 2011 dividend and will execute on share buybacks as they see fit.



  • Assume current rate in FX continuing for their 2012 forecasts (as of last week)
  • Rationale of renovations for 2012 is that the transaction environment is really weak anyway and that fully renovated assets are easier to sell
  • 2012 FCF estimate: at least in the $350-400MM range post dividend and all renovations
  • Pace for group bookings going into 4Q is up 6% - mostly rate driven with room nights mostly flat
  • SG&A always has quarterly volatility.  Since 2009, they have materially decreased costs.  Q3 to Q4 SG&A changes are mostly timing issue related.
  • Demand slowdown in Europe?
    • Slowdown in Rome and London- don't know if this is a sustainable trend. Even if RevPAR flat-lines in Europe there wouldn't be a lot of down side to their estimates since that was contemplated in the ranges they've given
  • Right now it's all about raising rates at their managed properties in NA - obviously they don't have the same leverage on the franchised hotels.
  • Seeing some strength in F&B but not a full recovery, but they are seeing better flow through due to their cost cuts.
  • Trends in NY are pretty good right now
  • Remain interested in acquiring brands with excess cash flow but not assets. 
  • Goal is to be a solid BBB rated company- which should happen over the next 12 months (2.5-3x)
  • Beyond that they will look at returning cash to shareholders - dividends and buybacks



  • Excluding the IRS settlement HOT reported $0.42 cents of EPS and $241MM of Adjusted EBITDA, 8% and 3% ahead of consensus, respectively

Management commentary

  • “Our brands showed strong top-line results around the world, driving managed and franchised fees up 17% in the 3rd quarter. Our Company-operated hotels translated higher REVPAR into margin increases of 140 basis points. We are also pleased with our continued footprint growth. Over the past four years, we have opened almost 320 new hotels, bringing our total to 1,071. We expect to continue growing faster than the market, both in terms of REVPAR and footprint, thanks to our brand momentum and exposure to rapidly growing markets."
  • “In an uncertain world, investors should also note that our balance sheet is in great shape, with net debt below $1.7 billion. In the coming weeks, our St. Regis Bal Harbour project will start generating cash as we begin closing on previously sold residential units. We expect more cash in 2012 as we complete this project."


  • 4Q11
    • Adjusted EBITDA: $270-280MM
      • reduction of $10MM off the top end and a $5MM raise off the bottom
    • SS WW Company Operated RevPAR & Owned: +6-8% (no FX impact)
    • Management & franchise fees & other income: +7-9% (-200bps impact of Japan & N. Africa)
    • VOI & residential earnings: flat to +$5MM
    • Bal Harbour: incremental earnings of $10MM and EPS of $0.03 and $30MM of cash proceeds from closings (not included in guidance)
    • D&A: $76MM
    • Interest expense: $56MM
    • EPS: $0.53 to $0.57
  • 2011 (changes from prior guidance)
    • SS WW RevPAR (company operated and owned): same but impact of FX benefit 100bps less than prior guidance
    • Earnings from VOI and residential increased by $5-10MM to $140-145MM from prior guidance
    • SG&A growth down 1% to 3-4%
    • D&A: -$8MM to $302MM
    • Interest expense: -$5MM to $225MM
    • Cash taxes: -$15MM to $65MM
    • EPS: +$0.02 - $0.08 (excluding the $0.18 IRS settlement benefit) to $1.75-$.179
    • Capex: Maintenance, renovation & tech: -$50MM to $250MM offset by a $50MM increase in investment projects and JV commitments to $200MM. VOI (ex Bal Harbour) net cash flow $35 higher to $200MM
  •  2012
    • WW SS Company Operated RevPAR: 4-8%
    • Adjusted EBITDA: $1.03-$1.12 and EPS: $1.96 to $2.25
      • Includes $20MM YoY decrease due to renovations, asset sales and FX and no earnings from Bal Harbour
    • 1% change in RevPAR = $15MM of EBITDA and 1% change in US Dollar vs. FX basket = $5MM


3Q Result commentary

  • SS WW RevPAR system-wide +11.6% (7.4% constant dollars)
  • SS WW Owned Hotel RevPAR +16.2% (9.2% constant dollars)
  • "EPS from continuing operations was $0.60, including a benefit of approximately $0.18 primarily from the favorable settlement of an IRS audit. Including special items, which primarily relate to a gain on an asset exchange transaction, EPS from continuing operations was $0.85"
  • Income from continuing operations included "a tax benefit of $35 million primarily from the favorable settlement of an IRS audit"
    • Total IRS refund received was approximately $40MM in 3Q11
  • There were $47MM of  after tax 'special items' in the quarter primarily related to a gain on an asset exchange
  • "Management fees benefited by approximately 300 basis points due to the conversion of 19 European hotels from franchise contracts to management contracts during the quarter. Excluding North Africa and Japan, management fees increased 25.8%."
  • In 3Q, HOT  "signed 24 hotel management and franchise contracts, representing approximately 6,300 rooms, of which 15 are new builds and 9 are conversions from other brands."
  • "At September 30, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms"
  • In 3Q11, 19 new hotels (4,900 rooms) entered the system and 6 hotels were removed from the system
  • At NA SS Owned hotels, revenues rose 7% while expenses increased 5%. WW owned SS revenues increased 14.6% whiles expenses rose 10.7%. 
  • 3Q Owned, Leased, and Consolidated JV results were impacted by 6 renovations and 4 asset sales. 
  • "Originated contract sales of vacation ownership intervals increased 3.8% primarily due to increased tour flow from new buyers and improved sales performance from existing owner channels. The number of contracts signed increased 8.2%... and the average price per vacation ownership unit sold decreased 2.7% to approximately $14,000, driven by inventory mix."
  • "Selling, general, administrative and other expenses declined relative to 2010 due to lower accruals for incentive compensation and lower legal expenses."
  • Capex: $79MM of maintenance and $77MM of development. Net VOI and residential spend: $30MM primarily on Bal Harbour
  • "On September 30, 2011, the Company executed a transaction with its former partner in a joint venture that owned three luxury hotels in Austria... The Company acquired two of the hotels, Hotel Imperial (Vienna) and Hotel Goldener Hirsch (Salzburg), in exchange for its interest in the third hotel, Hotel Bristol (Vienna), and a cash payment, by the Company, of approximately $27 million. The Company entered into a long-term management contract for the Hotel Bristol. The Company recorded a pretax gain of approximately $48 million and a deferred gain of approximately $30 million in connection with this transaction"



PNK breaks the string of blow out quarters with just an in-line performance. Concerns remain surrounding capex program.



"On an operating basis, Pinnacle had another very strong quarter led by record performances at our L'Auberge Lake Charles and St. Louis properties.  While several charges and other items affected year over year comparability, our third quarter results again highlight the effectiveness of our revenue growth and operational improvement initiatives"


- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment




  • They continue to be focused on removing non-value added expenses from their cost structure
  • Seeing strong increases in the number of new guests - especially at the top tiers which have grown double digits since the launch of myChoice
  • 3 of 4 hotels have had record RevPARs, 3 were up more than 11% and total RevPAR growth was 9.5%
  • Anticipate finishing the redesign of all of their property websites by 1Q12
  • Growth from customers under 40 has been strong
  • Saw growth in 3 of their 5 primary markets
  • In St Louis, 19% of guests contributed 49% of results
  • Not seeing any evidence of a pull back in spending from their guests
  • Bossier continues to be a difficult market; they believe it will remain under some pressure
  • Belterra - dynamics in the market will remain challenged for sometime.  Competition should intensify.  Will work at rationalizing expenses.
  • Reno- looking to sell the property as well as the land adjacent to it in 2 separate discussions.  Are far along in their negotiations.
  • Normal reward expenses under mychoice were being expensed as incurred but now need to be expensed upfront and expenses should be accrued as earned before they are used. 
  • Expect to get a refund of their $25MM deposit at Baton Rouge once the property opens
  • 3Q Capex: $40MM; expect 4Q to be $65MM - $45MM of which should be Baton Rouge



Accounting change should be smooth going forward barring changes

  • Q3 would’ve been $0.5 million better with no accounting change

Why didn’t you get the flow through on St. Louis and L’Auberge from the revenue growth?

  • A little bit of noise because of accounting change.  Thinks that there are meaningful improvements at those properties to come.

River Downs – any sense of budget or timing?

  • Waiting to see what Ohio is going to do

How much of $10.2 million Q2 accounting adjustment relates to 2011 and 2012?

  • $2.5m was for 2011, the rest for future years

Progression of capital spend for St. Louis expansion

  • 2/3 won’t get spent until 2013
  • Project should be done by end of 2013

What inning are you in for margin expansion?

  • Still in middle innings – haven’t gotten to “7th inning stretch yet”

Vietnam project financing?

  • Financing in place already even before PNK got involved
  • Still need working capital financing

Target margin

  • They don’t target margins
  • They target profitable growth

Sustainability of favorable promotional environment

  • Didn’t really provide an answer

Can River Downs be profitable before slots?

  • Highly unlikely

Why is there so much left to spend on BR when it is opening in 3Q?

  • Flooding slowed it down – were not released until mid-July to work on the site
  • Focused on the budget – will stay within budget and timeline
  • A lot of the spend doesn’t come due until after they open

Bonds bought back are not retired but for all practical purposes they are




  • "This performance continues to demonstrate that our strategies to elevate the guest experience at our properties, leverage the industry-unique benefits of our mychoiceguest loyalty program, and a team-wide commitment to implementing operational best practices are driving profitable revenue growth.  At the same time, Pinnacle's strong operating results provide a solid foundation and financial flexibility for the Company to build shareholder value from our diversified, return-focused growth pipeline."
  • "Our St. Louis segment and L'Auberge Lake Charles are consistently achieving record or near their highest-ever levels of monthly market share as guests increasingly choose these properties as their preferred gaming entertainment destinations"
  • "As a result of our comprehensive approach to growing revenues and implementing operational best practices, we are generating steady increases in spend per visit, particularly in our most profitable customer tiers, as well as operating margin improvements which together result in profitable revenue growth."
  • "Construction of the facility is moving at a faster pace since waters on the Mississippi river subsided earlier in the third quarter to allow construction to resume on the hotel and casino.  Reflecting the combination of nearly seven months in construction disruption and previously unanticipated site preparation work recently mandated by theArmy Corps of Engineers following historically high river levels earlier in the year, management expects the construction budget for L'Auberge Casino & Hotel Baton Rougeto increase by up to 3.0% from the prior budget of $357 million.  As of September 30, 2011, approximately $110 million of the budget had been invested."
  •  "Plans to redevelop River Downs Racetrack in southeast Cincinnati, into a premier racing and gaming entertainment destination that is planned to include up to 2,500 VLTs and new amenities, continue to progress. Timing will be dependent upon, among other things, the finalization of authorization of VLTs in Ohio."
  • "Completed its previously announced transaction with Asian Coast Development (Canada)... The first phase of the development, which will be the first fully integrated resort project in the country and will be managed by MGM International, is expected to open by the end of the first quarter of 2013."  
  • "In August, the Company entered into an amended and restated revolving credit agreement.  Among other changes, the size of the credit facility was increased from $375 million to $410 million and the maturity date was extended from March 2014 to August 2016.  Additionally, the effective interest rate was reduced throughout the pricing grid, with a current interest rate of 250 basis points over LIBOR compared to the previous effective interest rate of 375 basis points over LIBOR."
  • "During the quarter, the Company made open market purchases, at par and from cash on hand, of $10.0 million of its outstanding 7.5% Senior Subordinated Notes due 2015. The Company recorded a $0.2 million loss on early extinguishment of debt as a result of these transactions, related to the partial write off of unamortized deferred financing fees."
  • Balance sheet: $83.3 in cash & equivalents, "an estimated $65 million of which is used in day-to-day operations". Debt: $32MM drawn on $410MM R/C and approximately $9.8MM LOC's O/S
  • Capitalized interest: $2.9MM
  • Unusual charges in the Q:
    • "Net revenue and Adjusted EBITDA for Boomtown New Orleans was impacted by the property's closure for several days over Labor Day weekend due to Tropical Storm Lee and subsequent flooding disruption in the region... Management estimates Boomtown New Orleans Adjusted EBITDA was negatively impacted by approximately $0.9 million due to this closure and disruption."
    • "Adjusted EBITDA for Belterra Casino Resort and River Downs were impacted by unusually high medical claim expenses of $0.5 million and $0.3 million, respectively.  Belterra's Adjusted EBITDA in the 2010 third quarter included a one-time benefit of $0.8 million from the resolution of a tax matter, affecting comparability with the 2011 third quarter."
    • "River Downs recognized a $0.3 million charge during the 2011 third quarter related to abnormally high medical claim expenses."
    • "During the quarter, Boomtown Reno was classified as a discontinued operation.  The Company recorded a non-cash charge of approximately $11.9 million or$0.19 per share to write-down the assets."


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4Q guide down expected but near term visibility still cloudy.  positive 2012 commentary




  • 2 main observations: 1) 3Q and 4Q on target with expectations; 2) solid forward bookings
  • Costs remain contained
  • Strong 3Q close-in bookings in Europe and Caribbean
  • Caribbean/Alaska were better than expected and offset areas hurt by political/economic turmoil
    • This year, Alaska hit record yields
  • 2012: comfortable with level of bookings (higher load factor and price vs year-ago)
    • But not ready to give specific guidance yet
  • 2012: Not expecting yield improvement from economic tailwinds but will benefit from low capacity
  • Reduced Eastern Med itineraries for 2012
  • Will not need to access capital markets for next few years 
  • 3Q yields:
    • Ticket: +6.8% YoY, driven by all itineraries except Eastern Med and Asia; Alaska was +15%
    • Onboard: up marginally--increase spending among NA guests offset mix shift towards lower spending among European guests
  • Some modest cost shifting into 4Q
    • Some marketing expense moved from 3Q to 4Q
  • Realizing small gain in 4Q for selling 2012 fuel options 
  • 4Q yields: Caribbean (double-digit growth); lower yields in Eastern Med/Asia
  • 2012
    • "Things look pretty good but hard to ignore economic concerns in Europe" 
    • 2012 Booked APD trending higher YoY on a constant-currency basis; steady improvement from end of July to present day mainly due to sale activities
  • 2011 guide down: -12 cents due to FX; -8 cents from fuel options; +5 cents coming from better operating performance
  • Grandeur of the Seas/ Rhapsody of the Seas revitalization in 2012
  • Onboard rev outlook:
    • Anticipate modest improvement 
    • Onboard rev hurt by decreased gaming spend and change in composition in guest mix
      • Carrying more European guests (they spend less than US guests and are spending less YoY)
  • Fleet deployment outlook:
    • Since Q2 earnings, RCL Int will replace Vision of the Seas (Holy Land Itineraries); Celebrity Solstice will ship 50% of fleet to Western Med from Eastern Med
    • Overall, reduce planned Eastern Med deployment by 17% in 2012
  • Caribbean: 60% capacity in fall and winter and into 2012
    • Performing well; will grow YoY in 4Q
    • Celebrity Infinity, Summit, and Millennium (April 2012) upcoming Solsticizing
  • Customers still prioritizing vacation/travel; cruise travel still on top


  • Q4 close-in bookings: October was fairly solid, but are taking conservative view on winter months; Caribbean holding up fairly strong
  • 2012: 29% inventory in Europe; Eastern Med/Holy Land: 9% in 2012
  • By normal trends, by year-end of 2011, 2012 itineraries should be 50% sold-out
  • Too early to say about 2012 Alaska bookings
  • This year, Alaska did benefit from Europe dislocations 
  • 3Q yields are still 4% below yields achieved in 3Q 2008 yield
  • Wider than normal 4Q guidance range (10 cents):
    • Because of economic uncertainty
  • In a de-levering mode right now
  • Overall customer mood: no difference between Q4 2011 and 2012
  • FY 2011 Med yields: Western Med up slightly; Eastern Med down; 
  • 2011 Eastern Med impact: $90-100MM hit, 150bps hit in yields
  • Legend of the Seas had double digit yield declines recently vs. double digit increases earlier in the year
  • Eastern Med pricing still discounting?
    • Somewhat better pricing 
  • Corporate sourcing: 3/4 of US and 1/4 from Europe 




2012 Outlook: Though economic uncertainty is elevated and it is still early in the booking cycle, 2012 demand thus far has been solid.  Booked load factors and pricing are both running ahead of this time last year, which supports the company's expectation of continued yield accretion during 2012.  


3Q results

  • $1.90 EPS in-line with us, 4 cents higher than Street (excludes a $0.08 charge related to mark-to-market revaluations of fuel option portfolio)
  • Net Yields (current currency) rose 5.3%, beating Street and guidance of 5%
    • On a constant currency basis, yields rose 2.6% (Street: +1.7%)
  • Net Cruise Costs per APCD ex fuel:  +2.5% (+0.7% on constant currency basis)
  • Fuel: $608 per mt
    • Consumption at 333,000 mt

4Q guidance

  • EPS: $0.09-0.19 (Street: $0.22)
  • Net yields: +3-4% (current and constant $) (consensus: +4.9%)
  • NCC: +6% (current and constant $)
  • NCC ex fuel: +4% (current); +3-4% (constant)
  • EPS: $1.85-$1.90
  • Capacity: +7.3%
  • D&A: $180-185MM
  • Net Interest Expense: $82-87MM
  • Fuel expense: $204MM
  • Fuel consumption: 344k mt
  • % fuel hedged: 57%
  • 10% fuel price change sensitivity ex fuel options: $9MM

 FY 2011 guidance:

  • Net yield (current): +4% from +5-7% previously due to adverse currency movements; constancy currency +2-3% unchanged from prior guidance
  • EPS: $2.70-$2.80 ($0.15 reduction from prior guidance primarily due to stronger US Dollar and fuel option revaluation loss)
  • NCC ex fuel: +2-3% (current); +1-2% (constant)
  • Fuel expense: $761MM
  • Fuel consumption: 1317MM metric tons
  • Capacity: +7.5%
  • D&A: $702-707MM
  • Net Interest Expense: $357-362MM

 Guidance commentary:

  • Close-in demand was strong in the third quarter, but the company does not anticipate this strength will continue for the seasonally weaker fourth quarter.
  • Forecasted consumption is now 57% hedged via swaps for the remainder of 2011 and 55%, 47%, 30% and 20% for 2012, 2013, 2014 and 2015, respectively.  For the same five-year period, the average cost per metric ton of the remaining hedge portfolio is approximately $490, $520, $520, $575 and $580, respectively
  • The company recently sold its options for 2012, which were at a strike price of $100 and will recognize an associated small gain in the fourth quarter. The remaining WTI fuel option portfolio consists of options expiring in 2013 at a strike price of $90 bbl that covers an estimated 11% of 2013 consumption.

FX guidance

  • EUR: $1.39
  • GBP: $1.60


  • $1.3BN: cash and undranw RC
  • Remaining debt maturities for 2011, 2012, and 2013: $250MM, $600MM, and $1.6BN respectively 
  • Capex for 2011, 2012, 2013, 2014: $1.1BN, $1.2BN, $500MM, and $1.1BN respectively
  • Capacity for 2011, 2012, 2013, 2014: +7.5%, +2.1%, +2.4%, and +0.8%, respectively


Like every other release, Starwood beat consensus estimates and put forward lackluster guidance.  While the quality of the Q was just OK, 2012 RevPAR guidance shows the health of this business.



Core results in the quarter were softer than top line results imply.  While owned, leased and consolidated JV revenues were stronger than we estimated, flow through was weaker due to higher CostPAR.  The beat on fees was largely due to a boost from the conversion of 19 European hotels from franchise to more lucrative management contracts.  VOI and residential was below our estimate for both top and bottom line results.  Lower SG&A, interest expense and D&A all helped the bottom line and drove the beat in the quarter.




Revenue of $783MM was 1% ahead of our estimate and adjusted EBITDA was 2% better than we estimated.  


Owned, leased and consolidated JV revenue of $441MM was 1% above our estimate but lower margins resulted in segment results that were $9MM below our estimate.

  • Given higher RevPAR, we were surprised that owned hotel revenue didn’t grow more than just 2.4% YoY
    • Room count was down 7.5% YoY but SS WW RevPAR was up almost 15%
    • We estimate that room revenues grew 11% YoY but that ancillary revenues including F&B were down 11% YoY.  We don’t think that this is surprising as many hotels that raise ADR’s are giving more away like free breakfast, local calling, free parking and internet which used to be a source of incremental revenue.
  • RevPOR increased 8.9% while CostPAR increased 8.2%, resulting in poor flow through consistent to what we saw in 2Q11

Management, franchise fees, and other income came in 5% better than we estimated – with most of the upside coming from management fees benefiting from the conversion of 19 European hotels from franchise to management contracts during the quarter.

  • Net of the conversion of the European hotels, room growth was 30bps better than we estimated
  • Management base fees were 6% higher than we estimated, while franchise fees were 6% lower - for reasons already mentioned
  • Incentive were $3MM better

VOI and residential revenue and segment results were 5% lower than we estimated

  • Originated sales revenue was $3MM lower than we estimated – likely due to lower pricing on sales mix
  • Other sales service revenue was $4MM lower than we estimated
  • Deferred revenue was in-line

Lower SG&A, interest expense and D&A all helped the bottom line and drove the beat in the quarter.

  • SG&A was down in the quarter vs. general guidance for a 3-5% increase
  • D&A was $3MM below guidance
  • Consolidated Interest expense was down $7MM sequentially and $8MM lower than our estimate


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Initial Claims Close to Flat

The headline initial claims number fell 1k WoW to 402k (down 1k after a 1k upward revision to last week’s data).  Rolling claims actually increased week over week, rising 2k to 405k.  On a non-seasonally-adjusted basis, claims increased 17k to 374k. 


While flat week-over-week, initial claims remain high (over 400k), and are essentially flat year-to-date (405k rolling today vs. 410k at the start of this year). We've been arguing for the last several weeks that the largest divergence between the S&P and claims that we’ve seen in the last three years would likely result in mean reversion facilitated by a rise in jobless claims to the 450k+ level. Rather, thus far, the mean reversion has been driven by the market rising from 1100 to around 1 this morning. We remain skeptical that claims and economic activity will not be adversely affected by the profound loss of consumer confidence shown over the last few months. We continue to expect claims to rise, but are willing to strap on the accountability pants in the here and now and acknowledge that thus far we've been wrong.


It is interesting to note that in spite of a year's worth of record volatility, the market and claims are both essentially flat. These series are, in fact, co-integrated, as one would expect. In layman's terms that means that they tend to move together over time even if they are not especially correlated with one another in the short term. What that means is that you should pay special attention to periods in time when they materially diverge as they are likely to mean-revert going forward.  












2-10 Spread

The 2-10 spread widened 3 bps versus last week to 192 bps as of yesterday.  The ten-year bond yield increased 5 bps to 221 bps. This remains a very difficult environment for net interest margins.  






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




 Joshua Steiner, CFA


Allison Kaptur


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