Shorting France (EWQ)

Positions in Europe: Short France (EWQ)

Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio today.  We opportunistically shorted EWQ from a quantitative set-up with the CAC 40 broken on its long-term TAIL and intermediate-term TREND lines (see chart below).


Shorting France (EWQ) - 1. MEE


France remains an important EU country in the crosshairs—constrained by fiscal pressures (debt and deficit) and a web of cross-country sovereign banking exposure, the two combined put pressure on the country’s AAA credit rating. On 10/18 we penned a note titled “France is Going to Get Downgraded”, and made the important point that there exists an enormous outsized risk to the entire European bailout project for sovereigns and banks should France lose its credit rating: essentially the entire EFSF would be jeopardized, as France is the second largest contributor of collateral to the facility, at 20%, behind Germany at 27%.


From the fiscal side, France’s public debt as a % of GDP is likely to hit 88.4% this year, near the important 90% (and above) level that Reinhart and Rogoff outline in their seminal book This Time is Different as prohibitive to growth.  Through austerity, the government hopes to bring down the budget deficit, forecast to hit 5.7% of GDP this year, to 3% in 2013, or in compliance with the EU’s Growth and Stability Pact. Nevertheless, there’s been great push-back to Sarkozy’s austerity programs (including the most recent €8 Billion in additional budget cuts), which has also eroded his polling results for elections next April.


In response, last week the government came out and revised GDP to 1.0% in 2012 versus a previous estimate of 1.75%. Politically, Sarkozy remains faced with high unemployment, at 9.2% (vs 7% in Germany), or 22.8% among the French youth, and unlike Germany does not have the ability to cushion slowing growth through exports. 


As a risk signal, we continue to follow the spread between German bunds and 10YR French yields, which today reached an all-time high of 125bps since the creation of the EUR.


Shorting France (EWQ) - 2. ME


Matthew Hedrick

Senior Analyst


The important commodities, at least for the restaurant industry, moved higher over the last week.  Tellingly, corn moved higher despite outside market pressure.


Please scroll down to view the charts below the commentary.





Corn is an important commodity for all of the restaurants that we cover because either the companies have direct exposure or have exposure to protein costs (which are driven by feed costs).  Corn has moved higher despite outside market pressure from the strong dollar, weak equity market, and weak crude prices.  At the SAFM Investor Day recently, we learned that Illinois has the largest corn crop relative to its annual ethanol capacity of the major corn-producing states.  Therefore, Illinois is a good state to monitor watch in terms of its corn crop fundamentals.  News emerging today that the USDA has declared 44 Illinois counties disaster areas due to the effects of drought is bullish for the price of corn and negative for restaurant margins.  Farmers and ranchers in an additional 33 counties also qualify for assistance because they are contiguous to the affected areas.   The impact of dry summer weather is impacting much of North America’s corn and cattle country.


Cheese prices gaining 4.2% week-over-week is a negative for CAKE, DPZ, and PZZA given that all three have (varied degrees of) exposure to dairy prices in the fourth quarter.  CAKE had guided to year-over-year deflation in dairy for the fourth quarter but, despite significant volatility, it seems that dairy may be a headwind for the company in the fourth quarter. 


Chicken wing prices have continued their march higher.  As we wrote recently, food industry experts’ commentary as well as our own analysis gives us confidence that BWLD could have year-over-year inflation in wing prices beginning in the first quarter of 2012.  Replicating the 3Q11 strategy of driving comps via a promotion would be difficult in 2012 if the company faces significant inflation.  Some industry experts see $1.50 wings next year and sustained year-over-year inflation versus 2011 next year.


Coffee prices have been moving lower on the dollar strength and economic concerns stemming from Europe. 
































Chicken Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast 112



Chicken Wings
















Howard Penney

Managing Director


Rory Green





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The spear of the souvlaki stick: Assessing the Papandreou bombshell


In preparation for ASCA's Q3 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  •  Authorized the repurchase up to $75MM from time to time through Sept. 30, 2014 



  • “We’re operating right now in a rational promotional spending environment.”
  • “You can also see the tremendous stability overall in these margins, there is obviously some seasonality in the second quarter... and it’s most pronounced at Jackpot... The properties have very successfully managed to absorb increased volumes in the second quarter without an increase in controllable costs.”
  • “Six properties had year-over-year adjusted EBITDA growth with Black Hawk the only exception and there has been construction on the Canyon Road this summer that have had some impact on Black Hawk’s performance we believe.”
  • [Share count guidance] “We expect Q3 and Q4 in 2011 and all of 2012 to be approximately 34.5 million shares.”
  • “The credit facility side rates are generally compared to our previous bank facility at the time of its retirement. Despite an initial debt increase of over $500 million annualized interest, we expect it to increase annually only approximately $6 million pre-tax at current LIBOR rates.”
  • “On an year-to-date basis, approximately $156 million in year-to-date debt repayments have been made, including a $35 million payment that we made in July subsequent to the end of the second quarter.”
  • [Q3] “We estimate non-cash stock-based compensation expense will be $3.5 million to $4 million…. Capital spend will be in the $10 million to $15 million.  Net interest expense will be somewhere between $26 million and $27 million. Noncash interests expense to be $1.3 million.  The blended tax rate for the third quarter is going to be somewhere between 20% and 25%.”
  • “Including in Q4, we expect our blended income tax rate to be approximately 40% down from the 42% to 43% that we’ve been using again related to changes in our state tax allocation.”
  • “We expect to continue to generate significant free cash flow in the third quarter as shown by the $35 million debt reduction that took place in July.  We anticipate that for the quarter in whole we will be retained somewhere between $40 million to $45 million in debt; we’ll probably be closer to the $45 million number.”
  • [$12MM of corp expense going forward] “It might be just slightly less. I mean, we’ve obviously had some, as we defined in nonoperational expenses related over the last several quarters to the various transactions that we looked at and the stock buyback, but $12 million is a reasonable number to use.”
  • “To see improvements in gross revenue when operators are decreasing promotional giveaway dollars, which artificially lower the market revenues, I think you should look at it as a positive.”
  • [St. Charles bridge] “The bridge construction hasn’t started yet. It will probably start sometime late first quarter, early second quarter of next year.”
  • [Black Hawk construction] “There’s actually two projects going on. They were doing some sewer line work up close to our property in the city for a part of 2Q. They’ve now sort of reached a stopping point on that phase and will pick it up again in a few months and move it further down towards the bottom of the field leading into the city. But there’s a fairly long-term project to widen and straighten Highway 119, which is the road that comes up from the Interstate up into Black Hawk. And they’re doing the first portion of it over the next year and a half.”




"We saw strong RevPAR growth in the third quarter, especially at our owned hotels and those located in North America. In addition, performance at our comparable owned and leased hotels was strong, with margins expanding by 350 basis points. The significant renovations at five of our owned properties neared completion during the quarter and initial guest and meeting planner response has been overwhelmingly positive. We are enthusiastic about the anticipated long-term benefits of these renovations." 


- Mark S. Hoplamazian, president and chief executive officer




  • Hyatt House brand will replace their current extended stay brand.  Expect it to cost franchise owners less than $1MM to convert to this brand.  Getting good feedback from owners and developers.
  • Renovation at their 5 large renovation projects are going well and are on schedule.  Early indications is that the renovations will produce a large premium.  Most of the rooms are back in usage although there is still public, meeting and restaurant space under renovation; this should not cause any disruption to their results.
  • 1/3 of their group business and virtually all of transient has yet to book for next year
  • Corporate rate bookings are just starting and while they hope for high single digit increases, visibility is limited
  • Maintaining a strong balance sheet and liquidity is a top priority for them
  • Timing of the Jewish holidays helped them in the quarter
  • 3 cents per share of favorable tax rate
  • Changes of the rabbi trust benefits have no impact on EBITDA and EPS
  • Displacement from renovations impacted RevPAR by 200bps
  • 100bps of the margin improvement was due to non-operating items 
  • Higher margins on F&B and other revenues helped their owned and leased portfolio
  • North American mgmt and franchise business
    • Group - roughly flat revenues with slightly higher rate offset by lower occupancy
    • Continued to shift customer base toward higher rated business.  Mix shift had a positive impact on F&B
    • Continued to shift business from opaque and 3rd party challenges
    • F&B and ancillary revenues increased per occupied room
      • Banquet revenues increased 7% on a per group night basis
  • 50% of their fee increase was from new and ramping hotels and half was from same store hotels
  • RevPAR growth was negatively impacted by N. Africa and Japan.  China was negatively impacted by difficult comps from the Shanghai Expo.
  • International fees increased almost 4% ex currency - would be up 10% if not for Japan and Middle East
  • First 9M: Average rates are still 10% below 2007 in North America.  Transient occupancy is above 2007 levels though. 
  • Outside of NA, ADRs are still 5% below peak levels in the 9M ended 9/30
  • One third of the adjusted SG&A increase was due to higher bad debt, 1/3 due to higher headcount, 1/3 due to inflation and higher business levels
  • Tax rate: mid 20 range excluding discreet items for FY11
  • Higher D&A FY estimate is due to Lodgeworks
  • Higher Interest expense for FY11 is due to new debt issuance



  • Headcount increase does include the associates that came from Lodgeworks
  • Excluding one time items, SG&A is growing about 8%
    • Growth in headcount is demand base, wage inflation, merit increases, and increases in business activity
  • Park Hyatt NY: the developer has a defined price so there is no inflation risk to them. Looking at a 2013 completion date. 
  • Their investment portfolio has small strategic investments which will get wound down over time
  • 2012 capital investments will be lower than what they did in 2011 - since 2011 included 5 large capital improvement projects. 
    • Under $20MM of renovations for Woodfin properties, $70-80MM of maintenance
  • Owned and lease margins were due to property refunds (1/3 of the benefit)
    • Mix shift drives higher F&B and ancillary revenues and margins
  • Lodgeworks margin impact into their portfolio?
    • Just have a month of Lodgeworks in their results, but it should be accretive to their margins
  • They are bullish on NY in the long term. They have the benefit of 2 new Andaz property and the Hyatt they have is fully renovated and the other 2 are brand new product.
  • Europe: mid single digit in the quarter. Haven't seen any change in the recent weeks. Their presence in Europe is small - 5% of total room base (Germany, France, UK only).  
  • Extended stay - not seeing any significant change in length of stay
  • Share buyback as next round of lock ups expire:
    • They don't have a stock buyback plan
  • Use of cash?
    • Have commitments to several projects (NY for example)
    • Focused on enhancing presence in markets where they are not currently adequately represented
    • Looking at M&A opportunities (brand & M&A). M&A opportunities are to convert assets into Hyatt brands
    • Not really marketing properties for sale at this time 
  • There are large cities in the US e.g. Miami where they feel under-represented
  • A number of their hotels are still in ramping stages
  • Penetration with managed corporate accounts is rising with the growth in select service.  They are also seeing a web effect as they expand their market presence; they are also continuing to penetrate corporate accounts
  • Their comments re: peak RevPAR do not account for the shifts in their portfolio. 
    • So it's not really an apples to apples comparison since they have a lot more select service today



  • 3Q statistics (YoY):
    • "Comparable owned and leased hotels RevPAR increased 9.2% (6.9% excluding the effect of currency)"
      • "Comparable North American full-service RevPAR increased 7.1% (6.8% excluding the effect of currency)"
      • "Comparable International RevPAR increased 9.6% (3.4% excluding the effect of currency)"
    • "Owned and leased hotel operating margins increased 600 basis points" 
      • "Comparable owned and leased hotel operating margins increased 350 basis point"
      • "Owned and leased expenses decreased 4.3% ...Excluding expenses related to benefit programs funded through Rabbi Trusts and non-comparable hotel expenses, expenses increased 3.9%"
    • Capex
      • Maintenance: $22MM
      • Enhancements in existing properties: $72MM
      • Investments in new facilities: $4MM
    • Balance Sheet:
      • Debt: $1.23BN ($1.4BN of undrawn R/C capacity)
      • Cash & equivalents: $690MM 
  • 2011 information/ guidance:
    • Capex: $390-400MM
    • D&A: $300MM
    • Interest expense: $60MM
    • Opening of 35 hotels (including Lodgeworks acquisition)
  • "The Company added 26 properties during the third quarter of 2011, including 19 properties acquired from LodgeWorks"
    • Purchase price: $661MM 
  • "One hotel, Hyatt on Capitol Square, was removed from the owned and leased portfolio in the third quarter of 2011. The lessor of this hotel exercised a termination right"
  • "Selling, general, and administrative expenses decreased by 14.7%... Adjusted selling, general, and administrative expenses increased by 14.8%"
  • "As of September 30, 2011, [Hyatt had] executed management or franchise contracts for more than 150 hotels (or more than 36,000 rooms) across all brands. Approximately 70% of the projected new hotels will be located outside North America."


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