RevPAR and Baccarat have been the focus areas of investors but high margin slot revenue has been quietly creeping up and growth looks sustainable.



Could slots be the next big thing?  We think slots will be the big delta for the Strip and relative to expectations and margins, that’s where the leverage is.  Consider this, the incremental margin on an increase in slot play per visitor is around 90%.  The incremental margin on an increase in slot play due to an additional visitation is nearly the same.  There is no other important revenue driver in Las Vegas that has this type of economics.


Without a doubt, slots are a profitable business.  Yet, they’ve been in a long time slump, until recently. Every other Las Vegas revenue driver has been in recovery mode for some time.  Slot volume growth was consistently negative from November 2007 until October 2010 (with the exception of a slight gain in February 2010).  Since then they've been inconsistent.  It’s only during the 2nd half of 2011 did we see more a trend of positivity.  We think 2012 will be the first meaningfully positive year for slot growth since 2006. 


The following chart shows the recent monthly performance of the Strip’s slot business and our projections for 2012.  We model sequential seasonality using a 3 month moving average, adjusted for historical seasonality and GDP.  We would caution that the monthly projections can be volatile but directionally, our model has been accurate.  For instance, we think it is unlikely that we will see a double digit growth month, but we do think March growth will accelerate.  Annually, our model is less volatile and is currently projecting 2012 growth of 4-5%. 


Most importantly, if the slot business recovers as we expect, the flow through should be a major tailwind for Strip earnings (MGM and the 2nd derivative, BYD) and the stocks with significant exposure to the Strip.  There is still a long way to go for slot volume.  In Q4 2011, slot volumes were 21% lower than levels achieved in Q4 2006.  If our projection for 2012 is met, slot volumes would still be 19% below 2007.  Now if only the Macro will behave.







HBI’s stock not being down significantly is one thing, but GIL being UP? People aren’t contextualizing the real dynamics here. Both of these names look very risky (with minimal reward) to us.



Recall that HBI is blaming a $0.30 hit  to earnings on weakness in something that is only 8% of sales and profits. That same number is about 70-80% of sales for GIL.  We’re talking about $370mm for HBI, of which HBI noted that ¼ is what it refers to as ‘highly competitive’. That’s where it competes most heavily with GIL. This is $95mm that runs at a loss. Our sense is that for it to get to a point where HBI would let it go, it would need to be at about a -10% margin (this is usually a loss leader linked to other business).

GIL definitely has a more efficient cost structure, as well as the benefit of a zero percent tax rate. Let’s say that in a best case scenario, they stole this business from HBI and were somehow able to do so at a +10% margin. At best, we’re talking $0.04, or 3% on this year’s numbers, and less than 2% of the consensus 2013 estimate. But at a $25 stock and 12x P/E on next year’s estimates, the Street is already looking for 2013 earnings to nearly double for GIL.

This also assumes that HBI did not step up price discounting on the other 75% of its imagewear business. That’s far too safe an assumption.

It also assumes that HBI won’t get hit meaningfully due to the dominos set in place by Ron Johnson’s move to auction off space inside JC Penney stores.

Remember that HBI still has price integrity built into its 2H assumptions – which suggest margins right up there with the best names in the apparel industry (that don’t sell in basic categories like underwear).

The point here is that GIL’s stock is already above where it was when it collapsed last quarter, and yet the risk profile associated with one of its top competitor went up materially. HBI is more than 2x GIL’s size, and though I know people will argue with me that they don’t have perfect overlap with their businesses, I could care less. If HBI experiences pressure in its US branded wholesale business, it will find any area of weakness in its supply chain and competitive set to help fund any price or margin concessions.

Whether the first or second derivative of HBI impacts GIL, it won’t matter. Cash is cash.  In the meantime, if you want to bank on GIL putting up never before-seen earnings levels in 2013 (and pay 12x for it), be my guest.


An important note on TRADE here.

Keith added HBI to the short side of the ledger of the Hedgeye Virtual Portfolio this afternoon.

"TRADE support is 26.65 – should get smoked if/when it crosses that.”


His thoughts on GIL:

“Looks somewhat like HBI but needs a catalyst or will rip the shorts up to its TAIL at 28.19.” 


Let’s be careful on timing here. There’s no reason why the upcoming quarter can’t be the catalyst. 2H of CY12 looks bad. Did they give themselves cushion with their latest guide down? Everyone thought the same for HBI 13 weeks ago. Also, the market shrugged of GIL’s last guide down. If things change for HBI (which they should) then they will have likely changed for GIL as well.




HBI: Shorting

Keith adding HBI to the Hedgeye Virtual Portfolio. This has been one of our least favorite names fundamentally, and there’s a severe disconnect between fundamental and economic reality and the market’s reaction to the print. There’s enormous tail risk here.


As a follow up to yesterday's conference call, see our note "HBI: FAIL".


HBI: Shorting - HBI levels

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“We are pleased to see sustained transient business travel around the world in the fourth quarter. Demand from this segment was the primary driver of our results in 2011. Though group demand in the U.S. was stronger in the fourth quarter of 2011 than in 2010, corporations remain cautious about making longer-term commitments and this continues to limit visibility into forward bookings.”


- Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation



  • Their major renovations have been on time and on budget and expect results from those hotels to increase over time as people see the improvements
  • Going forward, you are likely to see Hyatt use their capital to secure international growth - Europe and Latin America
  • Their contract base is 35% of their existing portfolio, up from 28% 2 years ago.  Most of them are full service and require little capital from Hyatt.
  • 10% of their total EBITDA comes from Continental Europe (France, Germany, Switzerland)
  • Their strategy is to control costs and keep balance sheet flexibility
  • Transient business revenues in the Q were up 13%. Corporate rate increases are up in the mid single digit range for 2012.
  • Corporate group demand was stronger than demand from association business and other group segments
  • Booking in the Q for 2012 were up 8% vs. this time next year.  70% of their business for 2012 was already contracted at rates that were 4% higher than 2011.
  • RevPAR was negatively impacted by Japan, North Africa and Shanghai - excluding these regions, RevPAR would have been up 7%.  IMF were actually negatively impacted by these regions.  Excluding these regions it would have been up 3%
  • Tax benefit: $13MM related to foreign tax credit and $11MM benefit from the settlement of a foreign tax issue
    • Further details will be available in the 10k which will be filed later today
  • 2012 tax rate: low 30's excluding discrete items.  Don't expect the impact from discrete items to be as material in 2012 as in 2011.
  • Spent $60MM less on capex - variance is due to timing on a land purchase and cash payments on construction
    • $65MM of their capex for 2012 is carryover from 2011
    • $35MM on new investment on properties developed by them


  • There is a lot of in the period production versus visibility into future bookings
  • Pace for 2012 is in the low to mid single digits.  70% of the bookings are already at 4% higher than last year.  40% of the business for 2013 is booked and 25% of the business for 2014 is on the books.
  • There has been a proclivity from meeting planners to book things closer to the date.  Hence there has been more in the quarter for the quarter bookings.
  • Select service - experienced occupancy impairment due to bathroom renovations - about 150bps of impact on RevPAR
  • Lodgeworks has not had any negative impact for their portfolio.  That portfolio is actually doing quite well.
  • Need more urban representation for their select service brands and that will start to change this year as more of their new stuff opens.  It's also an area of focus for them.
  • Lodgework's RevPAR isn't in the comparable RevPAR #
  • They are seeing some interesting opportunities on the select service side.  Deal activity in the 2H11 was low in the US - more outside of the US
  • 50% of their margins growth for last year were due to 1x credits.  
  • Cost per occupied room decreased 2% in the quarter
  • Atlanta still had some rooms out of service, but the Atlanta market had negative high single digit RevPAR so that didn't help
  • Was there still some renovation impact in the quarter?
    • Atlanta hurt them
    • Select segment bathroom renovations hurt them
    • These 2 items hurt RevPAR 200-250bps (2/3 Atlanta)
    • NY & San Fran had a great quarter YoY - "as expected" and close to what they underwrote
  • Their presence in Europe is just city center high end hotels.  They don't serve local markets. So they have seen demand for their hotels hold up. 
  • NA managed portfolio is 45-50% driven by group business
  • 2011 displaced EBITDA from renovations was $25MM for the first 3 quarters and a tiny bit in 4Q
    • They expect to get that back and then some over time. Underwrote returns in the high single to mid teens.
  • Their SG&A was up 7% for 2011.  4Q had some 1x bad debt recoveries that were one time.
  • Rio - they have been actively engaged to secure entitlements to proceed with that development.  They are in talks to get debt financing. Plan to complete that project well ahead of Olympics.
  • Lodgeworks conversion costs of $15-20MM. They also are converting the Woodfin hotels - also $15MM of cost. 
  • Expect to be active on the M&A side on both ends.
  • Expect to be an investment grade company - 3.5x leverage or better
  • Why so much cash on the balance sheet?
    • They have some forward commitments for $600MM (more disclosure in the 10K)
    • Their capex should be funded from cash from operations
    • Their intent is to use their cash to grow the business
    • Opportunities in lodging tend to come in large chunky sizes - so they like having the flexibility to act
  • Lodgeworks - paid 16.5x for that deal which was highly dilutive?
    • Their deals aren't trades and it will take time for them to make a return.  
    • They don't look at the multiple they paid but what it will do for the company over time.  The number of their managed corporate accounts have increased significantly over the last few years as a result of growing select service.
    • The property level multiple they paid was much lower - 16.5x includes SG&A and other fees paid
  • They are very bullish on NY long term
  • Group component of their owned portfolio is about 40%
  • They are modifying their format for the next quarter to be primarily Q&A.  All questions will need to be submitted by 8:30am with the name of the questionaire not disclosed.  There will be live Q&A afterwards.


  • Adjusted EBITDA of $143MM came in $3MM below consensus 
  • Adjusted EPS of $0.31 isn't comparable to anyone's estimates since it includes a $28MM tax benefit.  Our 'normalized' EPS calculation was $0.11, assuming a 35% tax rate and an addback of the $4MM of asset impairment charges in the quarter.
  • Comparable 4Q RevPAR stats:
    • Owned & leased: +6%
    • NA full service: +6.5%
    • NA select service: +5.5%
    • International: +2.9% (3% ex FX impact)
  • There were 7 property additions in the quarter
  • “In New York City, we have four new or recently renovated hotels that have opened within the last 24 months. The momentum continues with several hotels in development that will double our presence by 2014, giving us an extremely well-located, essentially new property portfolio representing almost all of our brands in New York City within two years.”
  • Owned & Leased:
    • "Excluding expenses related to benefit programs funded through Rabbi Trusts and non-comparable hotel expenses, expenses increased 2.4%"
    • "As part of the acquisition of assets from LodgeWorks, the 150-room Hyatt House Boston/Burlington was added to the portfolio. The property was previously managed by the Company."
    • "One hotel, Hyatt Regency Crown Center, was removed from the portfolio, as the lease agreement expired."
  • NA  Management & Franchising portfolio changes:
    • Hyatt Regency New Orleans (managed, 1,193 rooms)
    • Hyatt House Philadelphia/King of Prussia (managed, 147 rooms)
    • Hyatt Place Waikiki Beach (franchised, 191 rooms)
    • 2 hotels were removed (including Hyatt Regency Crown Center)
  • International Management & Franchising portfolio changes:
    • Park Hyatt Abu Dhabi Hotel and Villas (managed, 306 rooms)
    • Andaz Shanghai (managed, 307 rooms)
    • Hyatt Regency Danang Resort and Spa (managed, 295 rooms)
    • Hyatt Capital Gate, Abu Dhabi (managed, 189 rooms)
  • Pipeline of 170 hotels (or more than 38,000 rooms) with approximately 70% outside North America.
  • 4Q Capex: $115MM
    • Maintenance: $43MM
    • Enhancements: $68MM
    • Investments in new: $4MM
  • Debt: $1.2BN; Cash & equivalents: $530MM; Short term investments: $590MM
  • 2012 guidance:
    • Capex: $350MM
    • D&A: $350MM
    • Interest expense: $70-75MM
    • Hotel openings: 20




“We are bullish about the long-term growth prospects for both Marriott and the global lodging industry. With a growing middle class and rapid economic growth in many emerging markets, global demand is increasing steadily. In the U.S., supply growth remains modest. As a result, we expect revenue per available room to continue to improve in most markets. Marriott is well positioned to benefit from these global macro trends. We expect 2012 to be an exciting year.”


- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International




  • Group revenue pace for 2012 is up 9%
  • 80% of their special corporate rates are negotiated and running up at a single digit pace
  • Their 2012 analyst meeting will be in China in June
  • In Latin America, have plans to add 50 green hotels in the coming years
  • In Europe, 30% of their lodging demand comes outside of Europe.  The Olympics in London this summer should help results.  9% of their fee revenue in 2011 came from Europe.
  • Middle East is still weak - particulary Egypt for them.  2012 should at least benefit from easy comps. Only 2% of their fees came from this region.
  • Obama simplified the visa process to help travel into the US.  Should be particularly good for guests coming from Brazil and China.
  • Their adjusted results were $0.04 ahead of their guidance, mostly due a lower tax rate due one time items.  Lower incentive fees were offset by better owned/ leased results.
  • NY RevPAR growth was moderated by new supply and competitor discounting
  • DC RevPAR increased moderately, tempered by weak government business
  • Philadelphia was very strong helped by the completion of renovations
  • Large group hotels remain somewhat encumbered by past booked business.  For smaller hotels, group business was up in the high teens rate.  Expect group business to continue to strengthen. 
  • Room demand from financials industry slowed but was still up in 4Q, but was made up by strength in other industries
  • 300 properties paid incentive fees in 2011
  • 40% of their WW pipeline rooms are under construction and 10% are pending conversion
  • Over 50% of their newly signed rooms in 2011 were international
  • Made strides to grow their luxury properties.  Spending $800MM on developing Edition branded hotels in Miami, London & NY. Will eventually recycle this capital.
  • Prior peak earnings occurred in 2007 - ex timeshare their earnings would have been $1.50 and they expect to exceed that in 2012
  • 1Q12 International statistics will only include Jan & Feb - and therefore they won't get the benefit from easier comps until 2Q
  • $400-$450MM of cash tax benefits are expected to be generated from the spin
    • $115-125MM  benefit in 2012
    • $80MM in 2011
  • Feel that they are appropriately leveraged at this time



  •  Why did fee revenue guidance decrease? 
    • Budget refinement around currency - stronger dollar than what they assumed before.  YoY impact to fees from currency was $10MM.
    • Fewer high incentive fee markets in NY and DC ended with lower fees in 2011 and had carryover into 2012
    • Weaker European market also impacted incentive fees as well
    • Timing of entry of fee income from new units entering their system
  • Is the sensitivity to 1% of RevPAR the same on the way up vs. down because of incentive fees?
    • It's roughly the same - although for incentive fees there is more sensitivity to moves up in fees although not at the 1-2% level
  •  Group revenue pace is up 9% in 2012 and rates are up about 3%?
    • The 9% increase is really from higher room nights, not rate
    • Just looking at the bookings done in 2011, for 2012 was up 3% in rate. So the group rates will improve throughout the year as more new business is booked at higher rates.
    • Roughly 70% of the group business for 2012 is booked
  • IMF fees:
    • DC is 1/3 US incentive fees and US was 1/3 of total IMF fees (so about 10% of total)
    • NY is about 5-7% of incentive fees
  • Middle East - saw a 25% decline in 2011.  ME was only 2% of their total fees last year
  • Expect stronger growth after 1Q12 vs. rest of the year.  Quarters 2 & 4 have better group bookings.  The 1Q comps are toughest for international as well. 
  • F&B was up 4% in the quarter
  • Why are IMF's taking longer to recover this cycle vs. last year?
    • RevPAR is still 10% below where it was in 2007
    • Also 65% of their incentive fees are from overseas but in 2007 it was only 35% so there was more sensitivity to RevPAR growth because of the structure of their contracts.  They have several big portfolios where incentive fees are calculated on a portfolio basis and those are still a whiles away, but the increase there would be material.
  • Why invest in Edition? 
    • Feel like they have the best partner with Ian Shrager and that there is demand for 'designed' hotels
    • They bought London, Miami, and NY buildings - 'A' locations in 'A' markets. They were expensive to be sure. $165MM for the Clock Tower. But they feel highly confident that they will be able to profitably recycle those hotels.  Partners take considerable comfort with their participation in the space.
    • They only invested $400MM in 2011 in development
    • While they are investing a lot, it's not 'alarming'
  • Most of the capital expenditures at the low end of their guidance range has been identified
  • There is some recycling of capital of roughly $100MM (loans) that they assume will occur in 2012
  • They want to stay investment grade, BBB. So they are anticipating an increase of debt in 2012
  • Assume modestly positive (2-3%) RevPAR growth in Europe.  Assumes that this is the biggest risk for them in their model.  But Europe is so small that it wouldn't make a big difference in their model even if Europe came in lower. They were looking at dynamics in individual markets - Olypimics, conferences, etc. 
  • They feel more confident in the US economy vs. last time they reported. They also continue to see good performance out of Asia despite difficult comps. 
  • No change in the message about returning cash to shareholders
  • Feel great about the way 2011 ended for group bookings- with smaller hotels in high teens and the +1000 room hotels lower
    • Their sales transformation is showing positive signs
    • Cyclicality is starting to move in their favor with the lag in group business hurting them during the earlier part of the cycle
  • Expect that RevPAR in Asia will be in the high single digits for 2012.  China, relatively lower #s in Jan due to the shift for CNY, but expect high single digits for the year. Japan is going to get easier comps.  Korea is good.  Thailand should have easy comps assuming no floods.  India is harder to be bullish on with the high inflation there. 
  • At ALIS, there was a little more optimism.  Well-capitalized franchisees are still getting deals done, but not at prior year's leverage.  In some cases they are providing credit enhancements. Full service in the US - it's still hard to get financing to get those deals done.  They are seeing a lot more conversions in the US than construction.  There is a lot of conversation about what will happen with the coming CMBS maturities
  • Think that they will see 1BN international travelers in 2012 (crossing borders), which is a massive number that is continuing to grow.  China is seeing huge growth.  The US has lost 5 points of travel share - singularly because its hard to get into the US - getting visas.  Chinese are required to go to an interview with one of the 5 consulates in China.  In Brazil its the same. Sometimes it takes months to get an interview. 
  • Share count at quarter end was 334MM diluted
  • Think that they would need to get back to 2007 RevPAR in 2013 or so.  But that wouldn't get them back to peak IMF fees in the US since there has been new capital invested in those properties and cost inflation.


  • Excluding timeshare, Adjusted EPS was $0.46.  
  • WW comparable systemwide RevPAR increased 5.9% or 6.3% in actual dollars
    • International comparable RevPAR increased 4.1% (5.9% in actual dollars)
    • NA comparable RevPAR increased 6.4% 
  • "We opened 210 properties with nearly 32,000 rooms during the year, including 80 hotels flying our new AC Hotels by Marriott flag in Europe. With great momentum in international markets, the growth rate for our hotel rooms outside the U.S. was higher than within the U.S. The Autograph Collection made its debut in Europe adding nine properties, including the four spectacular Boscolo hotels"
  • "Our hotel development pipeline increased to over 110,000 rooms as we signed new management and franchise agreements for more than 320 hotels with over 50,000 rooms in 2011, most for hotels yet to open."
  • In 4Q, 40 new properties (6,925 rooms) were added to the system and 9 were removed (1,946 rooms)
  • "Incentive fees declined 1 percent reflecting lower incentive fees in the Middle East and continued weakness in the greater Washington, DC market. In the fourth quarter, 27 percent of worldwide company-managed hotels earned incentive management fees"
  • "Worldwide comparable company-operated house profit margins increased 60 basis points...reflecting higher occupancy, rate increases and strong productivity. House profit margins for comparable company-operated properties outside North America increased 20 basis points and North American comparable company-operated house profit margins increased 100basis points from the year-ago quarter."
  • "Owned, leased, corporate housing and other revenue, net of direct expenses, increased $15
    million...largely due to higher credit card and residential branding fee revenues and improved operating results at owned and leased hotels."
  • 6.9MM shares were repurchased in the quarter for $200MM. "On February 10, 2012, the board of directors increased the company’s authorization to repurchase shares by 35 million shares to yield a total share authorization of 40.5 million shares."
  • 1Q12 Outlook:
    • WW Comparable systemwide RevPAR (constant $): 5% to 6% 
      • NA: 5% to 6%
      • International: 4% to 5%
    • Total fee revenue: $295-305MM
    • Owned, leased, corporate housing and other gross margin: $20-25MM
    • SG&A: $150-155MM
    • Gains & other: $2MM
    • Net interest expense: $25MM
    • Equity in earnings: loss of $5MM
    • EPS: $0.26 to $0.30
  • 2012 Outlook:
    • WW Comparable systemwide RevPAR (constant $): 5% to 7% 
    • "Assuming a strong U.S. dollar and modest fee revenue growth in hotels in Washington, DC"
    • Total fee revenue: $1,410-1,450MM (8-11% growth)
    • Owned, leased, corporate housing and other gross margin: $130-140MM
    • Impact of 1% change in RevPAR:
      • Fees: $20MM
      • Owned, leased, corporated housing and other, net: $5MM
    • SG&A: $660-670MM (+3-4%)
    • Gains & other: $10MM
    • Net interest expense: $105MM
    • Equity in earnings: loss of $5MM
    • EBITDA: $1,090 - $1,150MM (+10-16%)
    • EPS: $1.52 to $1.64
    • Capex of $550-$750MM (Maintenance: $50-100MM)
    • "Assuming additional investment opportunities do not appear, roughly $1 billion could be returned to shareholders through share repurchases and dividends."


***The following analysis is being provided courtesy of our Financials team, led by Josh Steiner. Please email if you would like to receive their work on the sector as well as their research on U.S. housing.***



The Ghost of Lehman

The ghost of Lehman Brothers continues to provide a data tailwind on this series, but that tailwind should turn headwind within a couple of weeks. For reference, after Lehman collapsed in September, 2008, the parabolic increase in jobless claims rippled through the government's seasonal adjustment factors, which mistook fundamentals for seasonality. Consequently, future years (2010 and 2011) have seen the ghost of the Brothers Lehman manifest in all sorts of government data reported on a seasonally adjusted basis. You can observe this plainly by eyeballing the late 2008 and early 2009 data in the chart below and then looking at the same time periods over the next two years. 


We think it's no coincidence that the market's behavior has rolled from positive to negative in the March/April timeframe in each of the last two years. While we think there's still considerable room to run on our bullish thesis, we're cognizant that this tailwind will turn headwind in the intermediate term.


The Data

The headline initial claims number fell 10k WoW to 348k (down 13k after a 3k upward revision to last week’s data).  Rolling claims fell 1.75k to 365k. On a non-seasonally-adjusted basis, reported claims fell 39k WoW to 362k. We continue to think that claims below 375-400k have the ability to lower the unemployment rate, which promotes a virtuous cycle as confidence and sentiment respond. 












Joshua Steiner, CFA


Allison Kaptur


Robert Belsky

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