- Since Q1 2011, IHG and HOT have been leading the pack in North America REVPAR. IHG may have benefited from a reverse FX impact.
- Hyatt is looking like they are finally seeing the fruits of their renovation programs
- Marriott is a laggard due to the higher concentration of group business which lags transient – they also have bigger boxes and an out-sized exposure to D.C.
- The standard deviation among the lodgers' performance in North America has narrowed considerably
Dollar weakness helped push the prices of many of the commodities we track higher over the past week. Protein and dairy prices declined as gasoline and diesel fuel costs continue to fall amid economic weakness. Overall, commodity costs are trending favorably for the restaurant industry.
Gasoline prices declined -1.2% over the last week and we view this as a marginal positive for the restaurant industry. Below are some quotes from management teams over the past six months on the topic of gasoline prices.
Cracker Barrel Old Country Store (6/5/12): And the impact of gasoline prices on the Cracker Barrel customer really shows itself in a couple of ways. One, as Sandy mentioned, 40% of the Cracker Barrel customers are non-local travelers. There's a fairly strong correlation in between miles driven, changes in miles driven and changes in our same-store traffic. There's a less strong correlation in between changes in gasoline prices and changes in miles.
Then, secondly, there's the availability of discretionary income. If the consumer is spending $50 more on gasoline in a month, that's $50 less that they may have available for restaurant purchases and for retail purchases. One of the things that we and most restaurateurs have seen is, I refer to it as the parable of the boiling frog. If there is a spike in gasoline prices, it's the frog leaping into boiling water and being shocked. If they are rising at a fairly gradual rate, the consumer has time to make adjustments and they tend to stay in the water.
Cracker Barrel Old Country Store (2/21/12): We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.
HEDGEYE: Given the change in tone from Cracker Barrel’s management team between February and June, we expect the continuing decline in gas prices to prompt management to be more positive in its guidance for traffic trends over the next couple of quarters.
Darden Restaurants (3/23/12): And so we think because all of those things could change, the jobs picture could get worse, the spikes in food and gasoline could abate, that it's appropriate to have a broad range as we look out to the fourth quarter and think about what the comps ought to be.
Corn prices moved higher last week as reports of dry soil and stressed crops throughout the Cornbelt turned traders bullish as the realization hits that with weaker-than-expected yields, the 14.7 billion bushel projection corn crop may not be met, despite large acreage estimates. This is a positive for beef prices going forward and a negative for Sanderson Farms.
Beef prices may find support this summer from the dry conditions on many pastures and ranches across the country. Lower corn crop expectations and poor grazing prospects will likely dissuade farmers from attempting to rebuild cattle herds that were dramatically cut by the drought last summer. The dry conditions are already forcing cattle producers as far north as Colorado to auction cattle earlier than planned.
Chicken supply is contracting by roughly 3% year-over-year, per USDA egg set data for the week ended June 16th. It seems that the peak in wing price inflation may be in but, as positive as that sounds for BWLD, it may be a slow grind lower; wing prices are stubbornly hanging in north of $1.80 and management at food processing companies that we talk to are suggesting that rebalancing the relationship between chicken wing supply and demand may take some time.
We added UA back into the Hedgeye Virtual Portfolio with the stock back down to its TRADE line of support on a downgrade this morning.
Here’s how we’re thinking about it on different durations...
With the stock up 100% since last August, we hardly think that getting into UA now is a ‘big call’. But in this market – one where our Macro team went to 100% cash and is thinking that the chances of a market crash are going up – we’ll look to be tactical around great growth stories like UA where the near-term qualitative framework marries up with the quant set-up.
Here Are Some Considerations on UA:
TAIL (3-years or Less): We think that UA will put up $3bn in revenue by 2014 – an impressive run given that it is coming off of a print of just under $1.5bn in 2011. That incremental top line breaks out as follows. a) $500mm in core apparel growth, b) $300mm in incremental footwear, c) $300mm in international apparel, d) $250mm in women’s apparel, e) $125mm in accessories (having brought hats and bags licenses in house). Our confidence here is greater than it is with most other companies given that UA clearly has invested (and will continue to invest) the capital in the right places to get the job done. One of the key points we look at is that it’s sitting at an EBIT margin of only 11% -- when it could be printing a margin number with a 2 if it wanted (but would otherwise jeopardize forward growth potential). It’s tough for us to find any name out there in retail -- -sans LULU – where we can build a consistent annual EBIT growth model in the 25-30% range.
TREND (3 Months or More): A key consideration is that we’re now anniversarying a period last year where inventories were up an average of 70% as UA battled through problems with it’s supply chain. Even with growth humming in the 30-40% range, 70% inventory growth was not exactly a confidence builder for anyone building a financial model. Since these problems, UA has made many changes in its management ranks, created new positions, and made key external hires to get its fulfillment to where it needs to be. The reality is that this happens to just about every company going through different stages of maturation. UA is no different. Where it is different is the speed at which it appears to be fixing the problems. The Punchline is that this is gross margin bullish for UA in the coming 3 quarters. Lastly, one interesting angle here is that UA has less than 5% of sales coming from outside the US. With a strengthening dollar, this creates a situation where its failure has actually turned into a near-term benefit relative to competitors that operate globally and need to translate profits to US$. That ‘benefit’ should wane in 2013 when we start to see the benefit of the new organization UA has put in place in Europe.
TRADE (3-Weeks or Less): There are some mixed message here.
- On one hand, business appears stable, with the year/year change in apparel market share continuing on the uptrend. In addition, the Hedgeye Sentiment Monitor is sitting near the lowest levels in a year, and the company is about to execute a stock split. While we all know that this should not matter, the reality is that there are some people that will always think that a $50 stock is half as expensive as a $100 stock.
- On the flipside, footwear continues to do a whole lot of nothing. That supports the ‘where could we be wrong’ part of our longer-term call, is the potential for a capital infusion needed (hence lower margins) to amp up the footwear business to attain our revenue numbers. The marketing spend to support UA’s new Spine technology launch starting in July is expected to be its greatest yet after which the company then introduces its new basketball silhouette in time for back-to-school.
- The bottom line is that the stock is back down to the low-end of the trading range with our TRADE factors lending clear support at $98.78.
Just a quick point on valuation – something we think needs a bit of context with UA. By most metrics – pe, EBITDA, EV/Sales, UA is just flat out expensive. But if you went by those metrics over the past 3-years, you’d pretty much have been wrong on both the long and short side almost every time. We think the better metric is EV/Total Addressable Market. For UA, that equates to about 0.15x based on our math. That makes it the cheapest name around. LULU is 0.33x, RL 0.45x, NKE 0.60x. Will that matter on a day where the consensus freaks out because apparel sales miss by 2%? No. But that’s when we think we’ll be able to step in and make the most money on one of the best names in the space.
UA’s Apparel Market Share Continues to Rebound…Footwear Not So Much
HEDGEYE RISK MANAGEMENT LEVELS:
HEDGEYE SENTIMENT MONITOR HAS A BULLISH SETUP:
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While Europe is busy bailing itself out of a mounting pile of sovereign debt, it appears its citizens are flocking to stores for the latest fashions. Trend line sales at fashion retailer H&M are trending down in the U.S., but throughout nearly all of Europe, there’s significant improvement. Europeans want to give H&M their hard-earned money and the company will gladly allow them to do so. This chart put together by the Hedgeye Retail team that we’ve illustrated here provides insight into the growth that lies ahead in Europe.
Claims Are Steadily, Predictably Moving Higher
Initial Claims rose by 1k to 387k, As usual, the prior weeks print was upwardly revised by 3k. Incorporating this 3k upward revision to the prior week's data, claims were lower by 2k. Rolling claims also increased, rising 3.5k to 386k, a new YTD high. For reference, the last time rolling claims were higher was December 10, 2011 at 388k. On a non-seasonally adjusted basis, claims fell 17k to 360k.
Fundamental Deterioration on Top of Seasonal Distortion
Rolling NSA claims, our way of cutting through the seasonal distortions taking place in the data, were better this week by 8% YoY, which is less good than the 10% and 9% YoY rates of improvement we've seen over the last few months, suggesting that beyond the seasonal distortions there is some fundamental softening taking place as well.
Operation Twist Extended
The 2-10 spread widened 5 bps versus last week to 134 bps as of yesterday. The ten-year bond yield increased 6 bps to 165 bps. While there was some relief this week, if spreads continue to sit a these low levels, the 3Q12 sequential change will rival what we saw in 3Q11 when banks across the board saw their margins flatten. The extension of Operation Twist yesterday will continue to put pressure on the long end of the curve.
Financial Subsector Performance
The table below shows the stock performance of each Financial subsector over four durations.
Joshua Steiner, CFA
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In preparation for CCL's 2Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary
- "We have...recently seen some positive trends in our European business so we are hopeful that booking patterns will return to normal levels sooner than we might have originally expected."
- FY 2012
- Mid-point EPS guidance: $1.55
- NCC (excluding fuel) per ALBD: flat versus the prior year
- "As to the current status of bookings, on a fleet wide basis – excluding Costa – occupancies for the remaining three quarters are lower than a year ago at slightly higher prices."
- "For North American brands, occupancies were slightly lower at slightly higher prices and for EAA brands occupancies are lower at higher prices again."
- "Costa is forecasting a loss for the year of approximately $100 million or a swing of $500 million from its previous earnings forecast."
- Higher airfares between North America and Europe have been a challenge
- "Our U.K. brands are holding up relatively well as compared to our Continental European brands. We have recently seen ...improving trends in Germany so we're hopeful that we have finally turned the corner there."
- 2Q 2012 (ex-Costa)
- "Fleet-wide capacity for the second quarter is up 2.7%, 2.9% for North America brands and 2.2% for EAA brands."
- "On a fleet wide basis, pricing is slightly higher than a year ago at slightly lower occupancy versus last year."
- "North American brand fleet wide pricing is higher than a year ago at flat occupancies. North American brands are 56% in the Caribbean, approximately the same as last year with the balance in various other itineraries. Caribbean pricing is nicely higher than a year ago at approximately the same occupancy levels as last year. Pricing for all other itineraries taken together is higher than a year ago at slightly lower occupancy."
- "EAA brand fleet wide pricing is slightly lower than a year ago on lower occupancy. EAA brands are 50% in Europe, slightly up from 47% last year with the balance in various other itineraries. EAA brand European pricing is up slightly versus a year ago on lower occupancies. EAA pricing on all other itineraries taken together is lower than last year also with lower occupancies."
- "On an overall basis, we are currently forecasting that constant dollar revenue yields will be flat to down slightly for the second quarter, slightly higher in North America, slightly lower for EAA."
- 2Q midpoint EPS: $0.07
- 3Q 2012 (ex-Costa)
- "Capacity is expected to be up in the 2.9% range, 3.4% in North America, 2.2% in EAA. On a fleet wide basis, third quarter pricing is higher than a year ago on lower occupancies. North American brand pricing is slightly higher than a year ago at lower occupancies."
- "North American brand capacity in the third quarter is 38% in the Caribbean, slightly higher than a year ago, 24% in Alaska, the same, slightly higher and 25% in Europe, which is about the same as last year. Pricing for Caribbean itineraries is higher than a year ago with pricing for Alaska and Europe cruises flat with last year. Occupancies for the Caribbean and Alaska cruises are slightly lower versus last year and occupancies for Europe cruises are lower than last year."
- "For EAA brands pricing is nicely higher than a year ago at lower occupancy. EAA brand capacity is 85% in Europe itineraries, which is slightly up from 82% in the prior year. EAA brand constant dollar pricing for European and all other itineraries is higher than a year ago on lower occupancies."
- 4Q 2012 (ex-Costa)
- "Fleet wide capacity in the fourth quarter is expected to be 2.9% higher than last year, 3.7% for North American brands, 1.7% for EAA brands. Fleet wide pricing is slightly higher than a year ago at lower occupancies."
- "North American brand pricing in the fourth quarter is flat versus last year at lower occupancies. North American brands are 43% in the Caribbean slightly higher than a year ago, 13% in Europe, which is about the same as the past year with the balance in various other itineraries. Caribbean pricing is higher than a year ago at higher occupancies. Europe pricing is also higher versus last year at lower occupancies and pricing for all other itineraries taken together is higher than a year ago on lower occupancies."
- "EAA pricing, where EAA brands are 61% in European itineraries is nicely higher versus the year ago at lower occupancies."
- "The close-in patterns are good, which is not necessarily always good for us, we like to see further out booking patterns. And I think that's going to start to happen. As business gets stronger closer in, then bookings get pushed out and pricing becomes more sustainable."
- "For Holland America, Princess and even Seaborne, they're doing fine except for these European cruises and they are doing all they can to try to shore that up right now. But Alaska seems to be okay, their Caribbean programs are fine, all their other long-term programs are fine."
- "The major markets for Costa will be Germany, Italy..., France and Spain. We're seeing evidence in France and Spain, actually of their business coming back already, less so in Italy and Germany. But we need Italy and Germany – Italy for sure."
- "I think 2013 should – obviously show an improvement over 2012. But it may take a year or two to get back to the kind of profitability that we expected to have in 2012."
- [Including Costa] "Total capacity we're up 3.7% in the first quarter, 2.7% second, 2.9% third, 2.9% fourth, and 3.0% for the full-year."
- [AIDA] "I think they're starting to see business come back. But there will be some level of hit because... in order to fill close-in, they've had to take pricing down a little bit."
- "Excluding Costa, we probably had about 1.5 point of yield increase on the onboard side in the December guidance. First quarter came in much more than we had anticipated and so we did build in a little bit of an increase in those numbers for the remainder of the year. So we are seeing some good onboard spend increases. All of the categories are up, all the major categories including casino in the first quarter."
- "I think Alaska has been pretty consistent and solid. I mean people doing more Alaska cruises than Europe cruises because of the cost of the Europe cruises going up, but Alaska seems to be doing okay."