The title of this note may be a little harsh but there is a chance that it is not.  Some are betting that there is more pain to come and some are buying the stock on account of the "massive" 50% decline.  We are not buyers here and see potential for, if anything, further downside.   We see no reason to own this stock besides the size of its market and that lone positive is overshadowed by the plethora of negatives and possible future negatives facing the company. 


“It ain’t what you don’t know that gets you in trouble.  It’s what you know for sure that just ain’t so.”

-Mark Twain


There are a lot of red faces among the sell-side analysts covering Green Mountain Coffee Roasters.  Anyone in the business can empathize with those putting forth a mea culpa to clients today but still, even after last night’s “surprise”, Mark Twain’s aphorism is worth bearing in mind.  What investors knew “for sure” has caused a wild ride in this stock over the past 18 months.  Giving management the benefit of the doubt, despite huge cash burn and recurring accounting concerns, was a leap of faith that has proved costly for many. 


We wrote a note on April 5th stating the following: “The question is: how bearish is bearish enough?  We think the stock could go to $25.”  In that note, “GMCR: THE SLOW BLEED OF THE GREAT COFFEE BUBBLE”, we highlighted several things we didn’t know for sure and the worrying harmony that existed between the most negative scenarios in our model, insider selling, and allegations outlined in a Class Action Complaint filed against the company.  The financials, we said, were the “big unknown”.  To a large extent, they remain so.  The emperor has fewer clothes than the market thought.  Does he have any at all?  We think Green Mountain has a business, and is a going concern, but there could be more pain in store.  With management’s credibility essentially vaporized over the course of a staggeringly poor showing during last night’s earnings call, the unknown unknowns are taking more mind-share among investors.


These unknowns are like landmines; there are difficult to see until it’s too late.  We think an accordingly prudent approach to this name is appropriate; investors should take a "show me" approach to management's projections, given the reputational blow that this company has inflicted upon itself.  If one of these still-buried landmines blows up, not only would that pose a problem in and of itself, it could set off others.  As sales disappoint, disgruntled shareholders are likely to add their voice to class action complaints and other investigations.  There is potential for it to get ugly. 



Still-Buried Landmine: Accounting Shenanigans


Given management’s hour long fumble last night, the question that people are asking is what type of internal controls the company has in place.  When prodded about what factors were behind the “moderating” sales growth, CEO Larry Blanford provided a telling response: “I think all of us are trying to take into account the – kind of these underlying factors and we’re still trying to understand them.  So that’s the honest answer.” 


Whether that is actually an honest answer is a risk; suspicions we referenced in our April 5th note about Green Mountain’s compensation structure being levered to net sales could hold an explanation.  Has the company been managing revenues by ordering K-Cups from third-party roasters?  The calculus behind executive level bonuses may have provided some incentive for senior officers to follow that strategy. 



Still-Buried Landmine: The Demand Model was Not a Model To Begin With

Six months ago, on November 9th, Green Mountain’s CFO Frances Rathke said the following on her company’s “demand model” and its efficacy: “as we noted in our remarks, we’ve had it tested now by outside experts and we, as well as the experts, feel it’s a very accurate and predictive model.  So, I think, overall, for fiscal '11, the portion pack volume came in very close to what the model predicted, and I think, once again, we were comfortable that we can rely on this as we go forward, into fiscal '12 and the future.”


We cannot reconcile that statement with what the CEO said last night: “over the last several quarters we have seen a dramatic increase order volatility, which comes, we think, from the dynamic growth of our business, the expansion of brands and varieties in our Keurig Single-Cup brewing platforms and demand shifts between our channels.”  Time will tell whether or not there was any real model in place besides the model that dictated executive compensation as being a function of sales. 


This dramatic shift in tone has shaken the conviction of the firmest believers in the Green Mountain story and rightly so.  The company clearly has a very poor handle on the demand for its product and the sales-inventory spread (chart below) is illustrating a company in dire straits.





Still-Buried Landmines: Capital Requirements, Capacity Glut, Margin Contraction


Despite the myriad concerns facing the business, management continues to invest a staggering amount of capital into its business.  Its capital expenditures for 2012, projected at $525-575mm versus $630-70mm prior, and beyond are aimed at supporting the future growth of the business, per the company’s most recent 10-K filing.   Of this2010 guidance for capital expenditures, $165 million will be invested in increasing packaging capabilities related to the Keurig K-Cup brewer platform, $65 million will be invested in packaging capacity related to the Vue brewer platform, and the balance is spread between expanding the physical plants, coffee processing and other equipment and investment in information technology infrastructure and system.  It is clear that the company will still be burning cash in FY12. 


Our question is, given that its capex is aimed at future growth, to what end will this cash be burned?  If the growth outlook is changing and the company obviously cannot offer a lucid picture of what demand is looking like for their product, how is ~$550mm in capex arrived at?  The changing demand outlook has caused management to alter its capex outlook but will the company also be burdened by over-capacity?  Given that the company has been building capacity in anticipation of future demand growth, is moderating demand about to saddle the company with underutilized assets?


Finally, it seems possible that further write-downs could be on the way which would further weigh on margins.  What are the chances that management came clean on all of the company’s problems at once yesterday?  There are clearly too many questions still hanging above this stock and the management team is not inspiring confidence in anyone.


Is it “all priced in”, as some amazingly resilient bulls want to believe?  We think there are too many risks that that just ain’t so.



Howard Penney

Managing Director


Rory Green



In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.



OVERALL:  WORSE: RevPAR was healthy and top-line was fine, but EBITDA missed expectations due to high SG&A growth and a higher contribution of occupancy to RevPAR than rate.  

    • SAME: 2013 and 2014 bookings are still looking good with most of the strength on the rate side. 
  • SG&A
    • WORSE: even excluding the one-time costs, SG&A was far higher than previous expectations
    • BETTER: Close-in bookings continued to be strong.  In the quarter for the quarter bookings were up 20% with equal contribution from rate and occupancy.  In the quarter for the year bookings were up 30% YoY, driven primarily by rate.  Rate strength was driven by group bookings and higher corporate rates.  They are still seeing a lot of activity come in that 90-day window.
    • BETTER: Hyatt was pleased with their progress and results of their renovations.  Renovations from their big five hotels contributed 190bps in margin improvements QoQ.
    • SAME: Hyatt continues to expect over 20 hotel openings in 2012
    • SAME: The company's long term outlook remained bullish.  The city seems to be absorbing new supply just fine with projected RevPAR growth in the mid-to high single digit range.  Both transit and group demand is up. 
    • SAME: On schedule and hope to open before 2016 Olympics, pre-opening development costs will continue. They still plan on engaging potential partners to complete the project down the road.
  • M&A
    • SAME: Hyatt purchased an asset in Mexico City and remain active in pursing M&A opportunities.  They have yet to see a strong pickup in the transactions market yet.
  • CAPEX:
    • SAME: 2012 guidance was raised from $350MM to $360MM due to the recently announced construction of Hyatt Place Omaha Downtown/Old Market.

Embracing Uncertainty: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV); Short Industrials (XLI) and Basic Materials (XLB)


Tomorrow is an important day in reporting monthly U.S. economic statistics, the U.S. Labor Report is released.  Keith is on the road, but we were discussing the potential stock market reaction to the labor report and, in short, we actually have no idea how the market is going to react.  This is probably not the best answer for a group of people that get paid to tell you what direction the market and stocks are going to go, but sometimes the beauty of using a system based on chaos theory is that you just have to embrace uncertainty.


As it relates to the U.S. Labor Report tomorrow, I would highlight a couple of points: 

  1. Our Financials Team noted this morning that initial claims over the past few weeks have been coming in even worse than they would have suspected, even as last week’s claim, as reported this morning, fell 23K to 365K.                                                                                                                                                                                                       
  2. Last month the U.S. added 120,000 jobs and consensus estimates are looking for 160,000 jobs additions for April, so an acceleration.  Thus, a number tomorrow below 160,000 will be a disappointment.  

Interestingly, the recent Challenger job report released yesterday appeared to support our view that the job market may decelerate.  Specifically, planned job cuts increased by 7.1% from March to April and 11.2% on year-over-year basis.


Even as we embrace the uncertainty of the job report tomorrow, we’ll stick with our range in U.S. equities to adjust exposure and manage risk.  As outlined in the chart below, our TRADE resistance level is 1,415, TRADE support is 1,393, and TREND support is 1,359.  A close at, or near, the TRADE resistance line suggests that disappointing news tomorrow is not baked into market prices.


What the market will actually do tomorrow on this news, though, is not clear, but as Bob Dylan said:


“Chaos is a friend of mine.”


We agree.


Daryl G. Jones

Director of Research


Embracing Uncertainty: SP500 Levels, Refreshed - SPX


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In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.

OVERALL:  WORSE - While RevPAR was better than MGM's guidance, EBITDA missed the mark due to higher expense growth.  We would normally give companies credit for hold issues, however, since hold was actually 1% higher than last year across their portfolio YoY, it's a bit of a tough argument to make.  MGM China hold was also high and contributed more than $25m to the property.

    • BETTER: Despite the tough comp RevPAR for 1Q came in at 4% better than the 2-3% guidance.  However, most analysts had higher RevPAR in their estimates.
    • SLIGHTLY WORSE:  MGM now expects 2Q RevPAR to be up "mid-single digits" with a "strong forecast for the year." On the last call they said that "second quarter looks particularly strong and we think our RevPAR is going to grow nicely throughout the year" with mid to high single digit RevPAR growth achievable.  We don't think that investors were hoping for mid-single digit growth. MGM did qualify their guidance in that they think that if close-in bookings come in better than expected that they can exceed their guidance.
    • SAME:  Convention room nights on the books will be same as 2011, however, since the some of the MGM Grand rooms are out of service, convention mix should be slightly better than 2011
    • SAME:  MGM is optimistic about the higher level of group bookings YoY, the opening of Zharkana in 4Q,and modifications to Crystals which should provide easier pedestrian access to Aria
    • SAME:  Unclear if there is an impact from SCC but it's really too early to tell. If there any impact " it’s around the 3% to 5% in traffic, but is not necessarily showing up in play."
    • SAME:  They are still excited to be pursing potential development sites in the western part of the state
    • SAME:  Corporate expense ex stock comp came in at $37MM, just a tad above the moderate increase to "mid $30 millionish" that was guided to
    • LITTLE BETTER:  Stock comp was $9.3MM vs. guidance of $10MM
  • D&A
    • SAME:  D&A was $237MM vs. guidance of $235 million to $240 million
    • SAME:  Interest expense was $284MM vs. guidance of $285MM


A surprising disappointment from a hotel company



“We look forward to continued progress in 2012 given the dedication of our people, the ongoing cyclical recovery in lodging evidenced by strong occupancy levels, limited new supply growth in the U.S., and increasing preference for our brands among developers, hotel owners, and guests. In addition, we are excited about our recently announced organizational re-alignment intended to enhance our effectiveness and support our growth in this decade and beyond.” - Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation




  • 2012 off to a good start
  • Look forward to further rate growth in 2012
  • Leisure & Business segments have been strong in Latin America
  • Will look to recycle the purchased Mexico City hotel in the future
  • Industry dynamics relatively good: US supply low; global travel continues to grow; China/India markets are robust


  • 1Q SG&A-broadly in-line with internal expectations
    • 1/3 cost allocation: 1x brand launch expenses, legal fees on a hotel
    • 1/3 cost allocation: global recruitment expansion 
    • 1/3 cost allocation: base-line costs
  • SG&A Guidance: Low teens growth for the rest of the year, excludes the 1x items
  • Mexico City hotel deal
    • wanted to establish presence in new gateway city
    • post-renovation will have 734 rooms
    • will close transaction in May
    • EBITDA $8-10MM for the remainder of the year
    • travel patterns from US to Mexico has been strong - both leisure and business
    • re-branding will have a significant impact
    • $40MM renovation investment will help Group business
    • will retain mgmt contract upon any sale
  • Sees select-service opportunities in Latin America
  • Europe: continues to look for opportunities
  • Group business: mainly driven by rate growth; in the quarter bookings were up 30%
  • Many bookings were booked within 90 days
  • Group business:
    • Strong segments: Consulting, technology, IT 
    • Weak segments: financials, farm land business
    • Too early for 2013 Group trends
  • Andaz: traction has been good; about 6 in the pipeline (mostly international); 
  • Lodgeworks: tracking ahead of $40MM EBITDA goal; in 1Q, had $10MM EBITDA
  • Renovation projects: NYC/San Francisco hotels doing well
  • Rio: pre-opening development costs will continue 
  • Comparable margins: +190bps driven by the 5 big renovations; -60bps from a couple of other renovations and select service hotels
  • Cost per occupied room were lower in 1Q
  • Large hotels seeing double digits gains in group business-mostly due to associations
  • Financial segment was 'reasonable' both for transient and group demand
  • Hotel transaction market: hearing more of 'potential transactions' as opposed to transaction actually going through but saw a little more M&A recently. Do not see a fundamental shift. Debt markets are stable. Financing for some projects (i.e. those with great locations, key cities) have improved.
  • Park Hyatt NY: construction progress going well; look to complete in early 2014
  • Worker contracts in 2012-2014 - still in negotiations with labor unions; difficult to forecast
  • Non-Europeans in Europe customer base: 40%



  • 1Q Owned and Leased hotels:
    • RevPAR +8.3% (8.7% excluding FX impact)
    • "Excluding expenses related to benefit programs funded through Rabbi Trusts and non-comparable hotel expenses, expenses increased 6.0%.. primarily due to higher payroll and related expenses as a result of higher occupancy levels."
  • Management and Franchising RevPAR: 
    • NA Full service RevPAR: +8.1%
    • NA Select service RevPAR: +7.2%
    • International REVPAR up 5.7% (6.5% excluding FX impact)
  • “Over the last year, we increased both development resources and financial capital dedicated to expanding our presence. Results of these investments are becoming more visible, as our base of executed agreements for future hotels has increased by 15% during that time period."
  • Announced $190MM acquisition of 756-room hotel in the Polanco area of Mexico City, which upon closing, will be re-branded as Hyatt Regency Mexico City. Hyatt will invest $40MM in the renovation over the property over the next 3 years. 
  • "Group rooms revenue at comparable North American full service hotels increased approximately 9% in the first quarter of 2012... as a result of strong corporate demand offset by slightly lower association demand."
  • "Transient rooms revenue at comparable North American full service hotels also increased approximately 9% in the first quarter of 2012...driven by strength from corporate customers."
  • 6 hotels were added (4 in N.A. and 2 outside of N.A.)/ 1 was removed (outside N.A.)
    • Hyatt North Houston (franchised, 335 rooms)
    • Hyatt Place Raleigh West (franchised, 132 rooms)
    • Hyatt Place San Jose / Downtown (franchised, 234 rooms)
    • Hyatt Place New Orleans / Convention Center (franchised, 170 rooms)
    • Park Hyatt Ningbo Resort and Spa (managed, 214 rooms)
    • Park Hyatt Hyderabad (managed, 209 rooms)
  • March 31, 2012  pipeline: 170 hotels (>38,000 rooms).  Approximately 70% of the future expansion is expected to be located outside North America.
  • SG&A increased by 32.9%, excluding the impact of the Rabbi Trust impact SG&A increased by $17MM or 25.8%. "Approximately one-third of the $17 million increase relates to brand launch expenses, bad debts, and legal fees."
  • 1Q Capex: $95MM
    • Maintenance: $23MM
    • Enhancements to existing properties: $52MM
    • Investment in new properties: $20MM (mostly land)
  • Corporate finance: 
    • Debt: $1.2 BN ($1.4BN available RC)
    • Cash & cash equivalents: $540MM
    • Short-term investments: $510MM
  • 2012 Information:
    • Capex: $360MM 
      • "The increase in capital expenditures as compared to previously announced 2012 information relates to the recently announced construction of Hyatt Place Omaha Downtown/Old Market."
    • D&A: $350MM
    • Interest expense: $70-75MM
    • Expects to open over 20 hotels

Retail: Watch Inventories. We Are.


Keep an eye on inventories coming out of Q1. We’re seeing a directional bifurcation between components of the mid tier (TGT/KSS bad, GPS, BONT good). That alone is notable. But tack on the fact that the off-price channel is ripping (TJX, ROST), and this is not a bullish event.



April sales were light as reflected by the beat-to-miss ratio coming in at only 9 companies coming in better than expectations with 11 misses. As expected, companies pointed to the holiday shift, weather, and even a later Mother’s Day to explain away sales underperformance, which would be more acceptable if March sales had come in that much better, but they didn’t. We expected some surprises after March sales demand didn’t come in stronger, but admittedly the surprise was in fact the resilience in Q1 earnings expectations with the final month now in the books. This was the key callout of the morning with five companies taking expectations higher, or towards the higher end of prior ranges, implying stronger margins due to favorable inventory positioning despite some posting weaker top-line results.

Heading into Q2, we think inventory management will prove more critical than any quarter in perhaps the last 4-years due to competitive pricing environment disruptions. This in turn will drive a clear bifurcation between the companies that have inventories in check versus those that don’t.


Here are some additional callouts from this morning:

Off-Price/Discounter Outperformance: ROST and TJX continue to outperform the rest of retail coming in +7% vs. +3.5%E and +6% vs. +3.3%E respectively representing the biggest beats to the upside. These results mirror outperformance throughout Q1, which reflects a strong sequential acceleration in sales growth both on a 1yr and 2yr basis for both retailers. Both increased their respective earnings outlooks reflecting early bullishness.


ROST posted sales up +14% on a -3% decline in inventories in Q1 resulting in an 8pt sequential improvement in the sales/inventory spread to +16%. Moreover, the increase in Q1 EPS outlook ($0.92-$0.93 vs. $0.89-$0.91E) suggests the company avoided gross margin contraction as was expected in what is the toughest margin compare of the year. Very positive.

TJX traffic continues to be a key driver of comp with stronger earnings suggesting similar margin implications as highlighted at ROST given TJX’s recent sales/inventory position as seen in the chart below. While TJX does not disclose where inventories at quarter end, we suspect this metric improved given stronger sales growth and ROST’s results. Improvement in the European business appears on track as well.

It’s worth noting that the comp spread between the off-price and total comps expanded for the fourth consecutive month (see chart below).


Mid-Tier Weakness: Mid-tier sales came in light with TGT, KSS, GPS, M, and BONT all missing comp expectations – SSI was the only one to come in ahead of expectations posting a less bad -1% decline vs. -4%E.


As noted, while this does not come as a surprise given the disjointed nature of the current department stores  environment, inventory positioning was critical in Q1 and will be again in Q2. GPS and KSS were good in this regard leading to GPS guiding EPS higher while enabling KSS to maintain expectations despite missing top-line expectations.


BONT sales were dismal coming in 2pts below expectations for the quarter reflecting a sequential deceleration in sales against substantially easier comparisons suggesting a turn in the business is still not likely near-term.


At GPS, with earnings higher on lighter sales, relative margin strength supports the prospect for $2+ in earnings this year that’s needed to drive the stock higher from current levels. More importantly, with inventories in check, earnings will
be less reliant on sales performance over the near-term.


High/Low-End Bifurcation: The High/Low comp spread expanded in April and Mar/Apr levels remained consistent with Feb +6pts wide.  JWN (+7.1% vs. +6.3%E) and Neimans +4.3% posted good numbers, while M (+1.2% vs. +2.0%E) and SKS (+2% vs. +5.6%E) came in light at the high-end, yet positive. On the low end, KSS (-3.5% vs. -1.2%E) and BONT (-5% vs. +0.3%E) missed handidly with SSI (-1% vs. -4.3%E) coming in less bad.


Inventories: GPS, TGT, and ROST were the retailers to callout favorable inventory positioning in April. Not surprisingly, two of the three increased guidance.


COST: Uncharacteristically missed expectations for the second consecutive month (+4% vs. +5.5%E). Gas had no impact on comps while Fx impacted total comps by -100bps. Categories performed equally well with all up +MSD with the exception of Majors down slightly due to weakness in electronics.


Outlook Updates:


ROST: ($0.92-$0.93 vs. $0.89-$0.91E)

TJX: (Q1: $0.54 vs. $0.51-$0.52E & FY: a penny higher on both ends of the range to $2.26-$2.36)

KSS: Maintaining $0.60 in EPS despite lighter sales

GPS: $0.44-$0.46 vs. $0.40E

LTD: $0.38-$0.40 vs. $0.35-$0.40 prior

HOTT: $0.07-$0.08 vs. $0.02-$0.05 prior; Q2 ($0.06)-($0.04) vs. ($0.03E)

ARO: $0.12-$0.13 vs. $0.08-$0.10 prior

AEO: Full-year $1.06-$1.12 vs. $1.08E


Retail: Watch Inventories. We Are. - mid tier off price SIGMA


Retail: Watch Inventories. We Are. - high low spread


Retail: Watch Inventories. We Are. - TGT monthly sales grid


Casey Flavin



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