CRI: Great Short into 2012


Conclusion: CRI is one of the most expensive names in retail. Valuation alone is a bad reason to sell. But growth trajectory and margin are both not sustainable. We think that once the calendar turns into 2012, CRI will be ripe for a far larger group of short and long sellers.



Sales growth of +24% was the strongest CRI has reported in the last 5-years. Looks great optically, but when taking into account the newly acquired Bonnie Togs business – which accounted for +7% and the sales pulled forward accounting for another +1% (adjusting for Q3 sales that were pulled into Q2), organic sales growth actually came in closer to +15%-16%. Good stuff, but this marks a sequential deceleration from the prior quarter at the same time CRI is about to go up against double-digit sales growth driven by accelerating sales in both Carter’s wholesale and mass businesses this time last year.


Margins continue to be under pressure with fall product costs up ~25% with mid-teen increases persistent through the 1H of F12. AURs are up anywhere from MSD to high-teens depending on the channel, but CRI is having the most success at Carter’s wholesale where units are actually up +8% on a +6% increase in pricing. In all other channels units are flat to down. We expect continued SG&A leverage to the top-line though think the opportunity for more meaningful cost reduction is modest with incremental Canadian retail expense and U.S. retail store growth investment of nearly $10mm each through the 1H of next year.


One thing to keep in mind as it relates to margins is that the sales/inventory spread has been negative for the sixth quarter in a row.


In addition, CRI pulled sales forward from Q4 while deferring the operating costs associated with those sales (when the company expected to realize the revenues) – that’s not a pretty setup for Q4. Is it enough to really derail the quarter? No. The call is bigger than that, but it certainly doesn’t help.


We’re not saying Carters isn’t a good brand, it’s actually a very good brand, but we don’t think the company is going to have the benefit of both pricing AND unit growth next year. Retailers, for the most part have taken and passed price increases along to the consumer – so far. But a major factor we can’t ignore is the real potential for a price war in the mid-tier channel in 1H12 spurred by JCP’s EDLP strategy. These companies (KSS, GPS, M) are doing their one-on-ones and telling people that they’ve got it under control and that no price war is brewing – but with all due respect, they don’t have a clue.  To intimate in any way that these companies have any certainty on pricing 2 or 3 quarters out is simply arrogant. Wal-Mart is also getting heavier in basics, which won’t help anyone. And who is to say that product costs easing in 2H will be good for Carter’s? As product costs come down, guess what happens? Competitors produce more product. And we all know that 99% of the product needs to sell at the end of each season – i.e. price will come down to accommodate that.


We’re shaking out a 10% top-line growth next year driven by retail store growth (3-4%), incremental international/Bonnie Togs (~3%), and another 1-2% each from Carter’s wholesale business and e-commerce. With the acquisition, you’re looking at a MSD-HSD top-line grower. That’s where we come out in F13 while the Street is assuming another double-digit year. Where we’re going to be most different from consensus is on gross margins. We’re modeling a -100bps decline in F12 as the company expects to pass through roughly two-thirds of future costs in the 1H. With cotton costs down sharply in recent months, we think discussions are going to be more challenging come spring for a brand like Carters that has increased prices by as much as mid-teens in some channels. With modest leverage in SG&A (-25bps) we are shaking out at $178mm in EBIT and $1.85 in EPS. Let’s not forget that Carter’s own retail stores boast an average 40% discount on day 1 for 90% of the product. Yes, it competes with itself.


The bottom-line is that execution risk is extremely high here, much is outside of CRI’s direct control, and there’s very little margin for error. With the stock now trading at 17.5x earnings and 10x EBITDA off next year’s Street estimates – and 21x and 11.5x ours – expectations are lofty to say the least. Has Carter’s all the sudden become a mid-teens grower – we don’t think so. Even if we were to give CRI the benefit of the doubt and assume a return to peak margins (~14%) some 500bps+ from where the model is today, we’d be looking at a stock trading at 11x P/E and 6.5x EBITDA F13 numbers – that’s where most of CRI’s peers are trading on current numbers. Those former margins represented a period of severe over-earning. We’ll never get back there again.


This thing appears to be trading on the Berkshire factor. This is an environment where you don’t get paid, lose your job – or both – for being short a company that’s rumored to be LBO’d and it actually happens. With 2 months left in the year, appetite for risk on small cap names like CRI is not too high on anyone’s list. So people are going along with the herd.


We think that once the calendar turns into 2012, CRI will be ripe for a far larger group of short sellers (or long sellers).


This one is right up there at the top of our short list.



Shorts: JCP, UA, HBI, CRI, GIL


CRI: Great Short into 2012 - CRI S 10 11




P.F. Chang’s reported a disappointing third quarter results before the market this morning.  Our takeaways from the numbers and the conference call that followed only confirm our cautious stance on the stock.  We believe that the acceleration of unit growth of Pei Wei restaurants with poor fundamental performance is – simply – a mistake.  The company’s answer to a question on the possibility of store closures was particularly telling in that our interpretation was that it was not a strong possibility.  Like Tennyson’s light brigade, PFCB is not reasoning why – or at least not reasoning enough.


PFCB’s stock has been beaten up badly over the last six months as concerns mounted over softening sales and then continued as the trend failed to reverse.   The two charts below show a fairly unmistakable downward trajectory in both concepts’ comparable sales trends.







From a margin perspective, the company experienced inflation in the quarter of approximately 50 basis points due to beef, broccoli, and Asian import prices offset by the benefit of a contractual price rebate on poultry.  Without the 50 basis point impact from the poultry rebate, cost of sales would have been up more than 100 basis points, but still in line with 4-5% company expectations for the quarter.  Operating costs were negatively impacted by supplies and printing costs related to Happy Hour, according to management.  Restaurant operating margins decreased 340 basis points at the Bistro and 200 basis points at Pei Wei.  The charts below show, first, the margin contraction that the company has seen in restaurant operating income and, second, that the company is in our “Deep Hole”, that is to say it is operating with negative same-store sales and declining margins.  Until we have conviction that the company is turning around one or both of these metrics, we would not consider it on the long side.







We do not subscribe to the belief that the company can continue to grow at the rate that it is with the fundamentals behind the concepts being so poor. 




  1. Management faces a struggle to drive traffic and seems to be trying many different things at once in order to do so.  Initiatives like small plates at Pei Wei for $3.95 and other lower priced menu offerings are having initial success driving some traffic while not damaging check.  It seems that progress on this front is slow as October’s trends are also soft.  The -3.7% comp at the Bistro in 3Q11 was against a +2.3% print in 3Q10.  October 2011 is trending at roughly -3% versus a +0.8% comp in October 2010. 
  2. Despite Pei Wei’s poor performance, management is opening 16-20 new Pei Wei restaurants in 2012.  Year-to-date, there have been two Pei Wei’s opened and no more are projected for the remainder of the year in domestic markets.  The company maintains that new stores are performing at-or-above system average revenue levels.  Focusing on closing underperforming stores, or unilaterally rectifying any issues the concept is having, is likely a better use of time and cash than accelerating expansion.  There is a pipeline that management is confident in but growing the store base is not a strategy that we believe will address the obvious issues being felt in many markets.  In responding to a question on closing underperforming stores, management didn’t seem to be thinking along those lines at all.
  3. SG&A was $13 million versus $23 million last year.  $8 million of the decline was due to lower share based compensation and lower incentive comp at all concepts and the Home Office. 
  4. Inflation in 2012 is expected to be level, or even higher than, what the company has been experiencing during the second half of 2011.  
  5. No doubt inspired by the success of EAT in driving the lunch day part, the Bistro will roll out a new lunch menu to an entire market.  Pending the success of this test, a system-wide rollout of the initiative will proceed in 1Q12.
  6. Sell-side sentiment has gotten more bearish of late but there is precedent for a continuation of this trade.  See chart below.




Howard Penney

Managing Director


Rory Green




A slight beat even with lower hold in Singapore.



"We set quarterly records for both net revenue and adjusted property EBITDA during the quarter. Strong revenue growth and margin expansion at Marina Bay Sands in Singapore and our portfolio of properties in Macau and the United States contributed to excellent financial performance overall." 




  • MBS's EBITDA would have been $438MM million and when combined with $6 million of nonrecurring expenses, margins would have been of 54.1%
  • Macau would have produced $401MM on a hold adjusted basis
  • Have an aggressive plan for the Plaza beginning with the addition of two new meeting VIP operators opening in the next couple of weeks
  • Table games drop in Las Vegas has the second-largest quarter in terms in the history of their properties
  • Sands Bethlehem's outlets should open next week and should be a driver of continued growth at that property



  • At MBS, they are reserving between 3-7% of RC. This past quarter they reserved at 5.4% ($24MM reserve)
  • Having a very high end customer is driving higher commissions since their players are buying in at greater amounts at MBS
  • If anything, trends in October would suggest an acceleration of the trends seen in 3Q at MBS
  • Vegas has very heavy Asian play this past quarter at their properties - "we have never seen a third quarter or summer quarter have those kinds of drop numbers"
  • Customers from China and HK are driving the massive VIP growth at MBS
  • Non-recurring: Got property assessment from the government - so that was $3.6MM and then there was a $2.4MM entertainment charge
  • They do not think that they will cannibalize any of their properties when Sands Cotai Central opens
  • Rate structures are done in a way to avoid cannibalization
  • Feel like the new rooms at Sands Cotai will help them continue to dominate the mass market
  • Any reason why the hold so far at MBS has been lower than theo? No. They are currently tracking at 2.82% YTD
    •  We estimate October is trending at 3.3% hold MTD
  • Maintenance spend of $400MM in 2012 and $1.2BN of project spend on Sands Cotai Central
  • In Singapore, majority of their Mass customers are from non-rated players - tourists. On the slot side, it's more rated players.
  • Visitation into MBS's casino is flat QoQ but visitation to the property has growth. Think that the train stop will be a very nice driver for retail, non-gaming spend and mass play.
  • They are not really spending that much to grow the VIP business and it should have a great ROI with low capital intensity
  • Capacity constraints at MBS: No constraints on VIP side, run at 80% capacity on the slot side which is pretty constrained on Saturday nights but is rarely a problem otherwise. On the Mass side, they are hiring more dealers to get more tables opened. They are only constrained 5.5 days a week. 
  • They know that they have underperformed in VIP and can't think of a reason why things would get worse from here. They don't see a case where things get a little worse before they get better.
    • The direct play at Venetian spiked to 24% this quarter and increased to 15% at Sands, so we have to agree
  • Think that if either Korea or Japan legalize gaming, the other will legalize in short order
  • His family is in favor of dividends, which they will definitely consider next year
  • Sheldon doesn't think that their are indications that the government intends to tighten money supply
  • Sand's advantage with junkets is that they are the only new supply in town for a while with the opening of Sands Cotai
  • Macau reserves? 
    • Very consistent with what they have done historically.  



  • MBS adjusted property EBITDA: $414MM and a margin of 52.9%
  • Macau adjusted property EBITDA: $388MM and a margin of 33.3%
  • "Opening approximately five months from today in March 2012, the 13.7 million square foot Sands Cotai Central will add substantial scale to the Cotai Strip and will feature amenities and attractions designed to broaden and deepen Macau's appeal as a destination for both business and leisure traveler"
  • Las Vegas: adjusted property EBITDA of $94MM 
    • "Table games drop was up during the quarter, reflecting strong baccarat play. Cash revenues from occupied rooms increased by more than 33.5% compared to the same quarter last year. In addition, 93% of our occupied rooms during the quarter were sold to cash-paying customers, compared to just 72% in the third quarter of 2010. RevPAR increased 8.6% as our FIT, group meeting and convention businesses expanded."
  • Sands China: 
    • Net revenue $1.2BN
    • Adjusted property EBITDA: $391MM
    • NI: $278MM 

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.70%

SP500 Levels, Refreshed: Shipping Up To Boston

“I'm a sailor peg, and I lost my leg
I climbed up the topsails, I lost my leg
I'm shipping up to Boston.”

-Drop Kick Murphy’s


We shipped Keith up to Boston last night to visit with Hedgeye subscribers, but he hopped out of a meeting to call us on the bat phone and give us an updated look at the market.  From a price perspective, the SP500 is shifting to a more incrementally bullish position from the TAIL perspective.


As outlined in the chart below, the SP500 is currently above the TAIL line.  While we need a three week validation to turn bullish from a TAIL perspective, this is an important inflection point.  On the shorter term TRADE duration, the SP500 is at 1,286 and beyond our overbought level of 1,279.


For those who are positioned more bearishly going into today’s action, no doubt it feels like you’ve “lost your leg”, or at least lost some relative performance.  Although we covered our short of the SP500 yesterday in the Virtual Portfolio yesterday for a gain, we are still running a tight exposure with 9 longs and 8 shorts.  Clearly, this is not ideal positioning for today.


A couple of thoughts, though, on both GDP and the European bailout:


1.   GDP growth at 2.5% quarter-over-quarter and 1.6% year-over-year  is certainly higher than we expected, though still below a level that would be needed to narrow the output gap or take the economy back to full employment in the near term.  More interesting, and perhaps disconcerting, was that personal consumption was a key driver, despite consumer confidence readings remaining abysmal.  Nonetheless, if we believe the number, the economy is on the margin improving, albeit at a tepid pace, and that is a positive.


2.   Purportedly a solution in Europe has been reached, though yields in Europe are telling us a slightly different story.  Specifically, the Italian 10-year yield is down to 5.87% today, but that is still near its highs of the year at 6.09%.  As of yet, the bond markets don’t fully believe the Eurocrats. Interestingly, while the Germans approved leveraging of the EFSF, they DID NOT approve more German capital.  In fact, the line was drawn at more German capital being contributed, which has longer term negative implications.


As Keith wrote yesterday, we’ll continue to respect what the market sees next . . . and that continues to be the case.


Daryl G. Jones

Director of Research


SP500 Levels, Refreshed: Shipping Up To Boston - 1. spx


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"



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