HedgeyeRetail Visual: FNP Levels For Top Long


On our Q3 Themes earlier today, we highlighted FNP as our top long here. We think it’s a gift at this price. With the stock below $9.50, it equates to Kate Spade trading below 11x 2013 EBITDA alone.

The chief concerns weighing on the stock here is how Juicy is tracking and the slowdown in global luxury. Juicy is a 2H story and Fall product just hit shelves this week so a bit premature perhaps, but keep in mind that Juicy accounts for less than 10% of EBIT - it does not make or break this story. As for the global slowdown, it’s reality. But this is a massively underappreciated budding global growth story that can buck the Macro backdrop.

With $1 in earnings power and a sub-$10 stock, we can’t find a better risk/reward setup in retail.


HedgeyeRetail Visual: FNP Levels For Top Long - FNP TTT



Industrial Indicator: CAT & Mining Investment Bubble

Chart of the Day

  • Current levels of capital investment by miners is at bubble-like levels
  • If D&A represents an estimate of maintenance capital spending, current capital spending is heavily skewed toward increasing output
  • Mature, cyclical industries (mining is among the most mature) do not support high levels of growth investment in the long-run

 Industrial Indicator: CAT & Mining Investment Bubble - Mining Capital Spending

  • Caterpillar has outperformed, with a millennium-start to date total return of 393% vs. 16.9% for the S&P 500
  • Caterpillar’s success is heavily dependent on this explosion of investment by miners.

 Industrial Indicator: CAT & Mining Investment Bubble - cat rel spx


Upcoming Events:  Truck OEM Black Book


Industrial Indicator: CAT & Mining Investment Bubble - perf 71212

Notes From Our Q3 Retail Call


Not a lot of buys in retail. On the short side: Macy's, Carters. On the long side: Fifth and Pacific (formerly Liz Claiborne), Nike.


JCPenney: Let’s beat a dead horse, shall we? Consensus is finally in: JCP is not performing well. Spain is 13% GDP relative to Eurozone, JCP is that to retail. Their impact on the industry is huge. Their strategy is to taken an item that sold last year for $100 and mark it to $25. They get consumers to appreciate that and want them to come to their store all the time. They need great product and aren’t there yet.



Notes From Our Q3 Retail Call - Q3RETAIL slide1



Over the past 5 years during the recession, the consumer sought out more discounts. Moms used to go into Macys and bring a ton of coupons and wait for an item to get marked down. That’s hard to ween people off of.


What brands are JCP putting out there for you to buy? Which are stuck by the bathrooms?


Why can’t JCP go bankrupt? It can. Who cares about Bill Ackman and what he thinks – remember Borders?


Kohl’s: Going head to head with JCP. Over past two months, getting creamed by competition. Turnaround needed on operating asset turns. The stock is cheap on next year’s estimates? Not a chance. It can go lower.


Dollar stores: Very negative outlook. (pg 20) Relative to the S&P 500, massive earnings growth in 2010. We don’t think comps will grow and the same goes for new stores –do we really need more dollar stores?



Notes From Our Q3 Retail Call - Q3RETAIL slide3



Food stamps also have a huge impact on margins for dollar stores. A ton of people are on food stamps and the surge in those receiving food stamps during the recession definitely helped dollar stores grow. Since January 2011, we’ve had salaries decline year over year. Consumption is up, however. We need more spending, less saving. We are well below consensus on earnings announcements going forward. Big drop in stock prices coming.


Capital intensity: Retail at sky high valuations. High returns relative to other industries. Peak margins. Stable earnings. We’re about 8 quarters into a decline in capital reinvestment period yet sales are up at a healthy level. If we’re coming off an investment period and we want to harvest, a few thing need to happen: the consumer needs to be strong or the company needs to put capital into capital expenditures (capex), which will hurt margins. Or they can have their top line rollover.


We like companies investing in all the right areas. Those who want to grow e-commerce sales who want to grow 10%-50% online because eventually, that’s where everyone’s going to go.


Notes From Our Q3 Retail Call - Q3RETAIL slide2


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Fleeing The ECB

So last night, the European Central Bank’s (ECB) 0.00% rate for deposits kicked in. What would you do if your savings account was earning literally zero interest? You’d probably pull it and that is exactly what happened last night. Deposits on hand at the ECB dropped from €808.5 billion to €324.9 billion – that’s a 60% drop!



Fleeing The ECB - ECB deposits



But this is potentially a positive catalyst for a weathered Eurozone. We anticipate that these funds will be put to work for both public and private lending. But we caution that more borrowing encouraged by cheap money is not a solution for Europe’s debt problems.


The point is: watch what the ECB is doing. Knowing how it interacts with Eurozone countries is pivotal to success.



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.




  • WORSE - Quarter was in-line but low quality and guidance was effectively reduced 





  • SLIGHTLY WORSE:  Supply growth continues to slow but MAR is not too concerned
    • As expected, MAR saw a slow down in supply growth in China similar to what they discussed on their last call. However, the slow down must have been more than what they expected since delays in China were a leading driver to lowering room openings by 5,000 in 2012. The government suggested slowdown in construction has caused some projects that were under construction to get temporarily put on hold until the governments gives their blessing for growth to resume. 


  • IN LINE:  Group bookings pace for remainder of 2012 is 10% just a touch below the 11% pace at the end of March 
    • Booking pace remained strong for the balance of 2012 and 2013 booking pace is up 8% thus far.


  • SAME: As expected, ME RevPAR improved from the 6% decline seen in 1Q12
    • MAR expects the ME to perform 'reasonably well' for the balance of the year as occupancies improved compared to last year’s interim spring results. However, travel wholesalers still aren’t jumping back into the market and therefore continued volatility in this market is expected


  • WORSE:  They are now expecting 5k less room openings and 9k rooms leaving the system.  They continue to have slippage in opening dates for some new hotels in Asia, Middle East and Mexico. 


  • SAME:  Maintained 20% for FY 2012


  • SAME:  Weak European economies will continue to be a headwind. European REVPAR outlook hasn't changed from previous guidance
    • Benefit of the Olympics and the Eurocup will be somewhat counteracted by weaker macro. Expect 3Q to be a little above 3% and 4Q to be a little worse 


  • BETTER:  Very strong performance at leased hotels in Tokyo and London partly contributed to outperformance and raised guidance in the owned, leased and other revenue segment


  • BETTER:  Expect DC to improve in 2H 2012 and 2013, due to strong group bookings 
    • Group revenue bookings in DC for the Marriott brand are up 10% for 2H12 and 16% for 2013. 2013 should be a good year overall in this market


The first chink in the lodging armor



"In the second quarter, our business performed well in most markets around the world.  In North America, strengthening group business, more travel by our special corporate customers, especially in the technology and consulting industries, and the impact of modest supply growth, drove our occupancy and room rates higher.  In Europe, more travelers from the United States, Russia and China helped move REVPAR higher.  In the Asia Pacific region, solid REVPAR growth resulted from strong economic growth and maturing new hotels." 


- Arne M. Sorenson, president and chief executive officer of Marriott International




  • They are not seeing a decline in their NA business.  Saw an uptick in sellout nights in the quarter. 
  • In Hawaii, as hotels reached capacity, they had less rooms to fill at the higher current rates
  • Expect to be able to yield well in the seasonally slower 3rd quarter
  • Olympics and Eurocup championship to help European RevPAR next quarter, but there are also economic headwinds
  • Slippage in openings for new hotels in Asia and ME.  Continue to see a lot of conversion opportunities around the world, but they also take longer to open due to required renovations.
  • $15MM of the decline in guidance is due to RevPAR in Europe, less openings, and FX, balance was due to the sale of corporate housing unit (which had no impact on EPS)
  • DC: interest in upcoming elections is driving business to the city.  Bookings for 2H are up 10% and 2013 is also shaping strongly.
  • Catering revenue increased 7%.  2013 booking pace is up 8% vs. just 1% a year ago
  • Group business on the books for 2013 are up 4% and are looking for high single digits increase in corporate rates
  • Growth in China moderated in 2Q but still delivered strong growth at 8% (in constant $)
  • ME occupancies increased but they are continuing to see volatility in this market
  • Added 100 hotels to the NA pipeline in 1H12 vs. just 57 last year during the same period
  • Lots of ins and out in the quarter
    • Fees were 2 cents below guidance due to lower relicensing fees and lower RevPAR
    • Benefited from better lease revenue
    • Favorable tax item helped
    • 1 time insurance benefit
    • Higher fees in from branding in the Q
  • NA incentive fees increased 15% despite declines in DC
  • FX rates were more of an issue this year than last.  They hedged 70% of their exposure to Euro, GGP, Yen... fx impacted them by ~$9MM in the Q
  • SG&A $7MM was related to key money on a terminated contract
  • Expect high occupancy through the summer through the Republican and Democratic conventions in Charlotte and Tampa
  • MAR will continue to operate 115 Courtyard hotels under management agreements after the sale of their minority interest in the JV.  They expect to receive $5MM of deferred management fees. 
  • Will share their 2013 earnings outlook with investors in February vs. their usual guidance in October. 


  • Execustay business (mid-single digit $MM's impact) , delayed openings, lower RevPAR in select markets (not a global theme- just some luxury hotels impact by new supply or other market specific issues.
  • Why did the Marriott RevPAR decelerate and underperform STR data?
    • Difference from STR is just due to differences in mix
    • DC is about a point lower and there are a few large hotels that accounted for another 50-75 bps in the quarter before the STR benchmark number
  • Incentive fee growth:  Still expect full year 2012 growth to be about 20%. In 2Q, it was the first time in a while that they saw NA fees increase more than international. Once some renovations are complete, that should also help growth.
  • Have 2 quarters on the books at just under 7%.  Unlikely that they will come in at the high end of their RevPAR range of 6-8%... sounds like 6-7% is more likely than 7-8%. International is really only 25% of their total fees and therefore, it's less of an impact from lower international RevPAR guidance.  RevPAR decrease was driven by 3-4 large hotels in ME/Asia Pacific market.
  • Termination fee of $12MM.  There was a $14MM termination fee received related to one hotel but they had a $7MM charge against that... so the net benefit in the Q was $5MM. Owned and leased hotels in London and Tokyo are doing really well.
  •  Decline in managed room count over the last 2 quarters?
    •  In the US, most of their growth has been mostly franchised limited service
    • Managed growth is mostly through conversions (Autograph)
    • Outside the US is still an overwhelmingly managed story
  • What % of the 90,000 pipeline rooms are international? 50/50
  • Europe: expected to tick along that 3% rate with 3Q better and 4Q worse
  • China: have been at 10% this year, and expect that to go to a high single digit rate for 2H
  • ME: mixed bag.  Optimism for Egypt. Dubia is very strong - a safe haven in the ME.  Rest of the ME varies dramatically from place to place. Generally the ME should be performing reasonably well for the balance of the year.
  • Each quarter they take into consideration cash needs and credit ratios when they consider how much to buyback
  • Europe is 300 bps less in actual currency vs. constant $.  The 5-7% International RevPAR guidance would be 300bps lower in actual dollars due to the stronger $.
  • Have been pleasantly pleased that Europe is performing at 3% given the macro
  • In the Q for the Q bookings are about 30% of their business for the year.  In the Q for Q business is lower than 1Q because they had less vacancy.  They are seeing the ability to drive rate in the Q for the Q.
  • Think that ex-Olympics drives about an extra 1% of RevPAR
  • Q2 includes some very high occupancy nights and as a consequence for very short-term bookings at higher rack rates
  • Oversupply issues in China? 
    • Doesn't think that investors should be worried at all about oversupply
    • Think that there will be short periods where it takes some time to absorb new supply but longer time demand is growing. China only has 1MM rooms right now vs. 5MM rooms in the US.
  • Credit card and residential branding fees in the Q: $5MM of branding fees were one time and were expecting it to come in sooner than they thought
  • On a full year basis, owned/leased properties are a big part of the increased guidance
  • They are not expecting to get any more business interruption payments from the Tsumani
  • Special corporate customers know that pricing has come back and there has been a shift in "power" when negotiating rates, which are still materially lower than the peak rates in 2007.  2013 negotiations have not started.
  • Best guess is that they should still be able to open 90-105k rooms through 2014.  Biggest story in this is China where they are seeing a "government encouraged" slowdown. Are seeing some pauses in construction. Their people on the ground believe that projects will resume once the government is done with its transition later this year.  Unclear whether the 2013 are going to be delayed. (I think it's a safe bet that they will)
  • Will continue to manage their leverage at 3-3.25x
  • Government per diem rates/ what % of their business comes from this segment? 
    • Mid-single digits is their exposure. Government is trying to reduce per diem rates,which means that their employees will get priced out of city center full service hotels.
    • They are looking to decrease their exposure to government business anyway
    • They don't think that DC RevPAR will go down again next year
  • How does the "Fiscal Cliff" factor into their guidance? 
    • So far they are not seeing any impact from that threat
    • They are not factoring in the potential impact of the tax cuts expiring
  • Recovery in secondary markets has been as good as primary markets
  • They are hiring to meet higher occupancy. As they go into 2013, they will see that hiring is due to new openings vs. occupancy growth.  As group business grows, they will need to hire people to deal with the F&B side of the business.



  • "With robust group bookings in North America, including Washington, D.C., we expect strong REVPAR and room rate growth in the second half of the year.  In fact, group revenue on the books is up 10% for the second half of 2012 and up 8% for 2013.  We are targeting high single-digit percentage increases in special corporate rates for 2013."
  • "Property-level revenues from group customers at comparable Marriott brand hotels increased 8% in the second quarter with banquet revenue up 7%.  Special corporate revenue also increased 8% during the quarter."
  • "While second quarter REVPAR growth benefited from strong group and special corporate business, it also reflected some impact from weak results in Washington, D.C. and renovations at a few hotels.  In other markets, such as Hawaii, our hotel occupancy was both very high and well ahead of the market, constraining our REVPAR growth in the quarter."
  • "Our development pipeline totaled 115,000 rooms at the end of the second quarter, excluding the pending Gaylord acquisition.  While we added 8,000 rooms to our pipeline in the second quarter, new hotel construction delays in the Middle East, Asia and Mexico pushed some openings to 2013.  We now expect to open 20,000 to 25,000 rooms worldwide in 2012, not including Gaylord branded rooms, and 90,000 to 105,000 rooms during the three-year period from 2012 to 2014."
  • "We completed the sale of our interest in the Courtyard joint venture early in the third quarter." [for approx. $90MM]
  • "We still expect to return $1 billion to shareholders in 2012 through dividends and share repurchases."
  • "Marriott added 29 new properties (5,058 rooms) to its worldwide lodging portfolio in the 2012 second quarter. Thirteen properties (2,914 rooms) exited the system during the quarter. 
  • "North American incentive management fees increased 15% in the quarter. In the second quarter, 30% of worldwide company-managed hotels earned incentive management fees compared to 25% in the year ago
  • "Owned, leased, corporate housing and other revenue, net of direct expenses, increased $32MM in the 2012 second quarter...  largely due to strong results at leased hotels, particularly in Tokyo and London, $12 million of higher termination fees, $9 million of higher credit card and residential branding fees and a $2 million business interruption payment from a utility company related to the 2011 tsunami in Japan."
  •  [SG&A] "The increase in expenses largely reflected $7 million of accelerated amortization of deferred contract acquisition costs related to one property that terminated in the quarter and a $5 million increase
    in reserves primarily associated with guarantees. The remaining increase reflected routine compensation and other cost increases."
  • "The remaining share repurchase authorization, as of June 15, 2012, totaled 25.8 million shares."
  • 2012 Outlook: 
    • Comparable WW RevPAR guidance: 6-8% (NA: 6-8%; International: 5-7%)
    • Adjusted EBITDA: $1,115 to 1,165MM
    • "Compared to prior expectations, anticipated fee revenue is modestly lower due to the impact of foreign exchange rates, the sale of the corporate housing business, some delayed hotel openings and softer
      REVPAR growth in some markets."
    • Gains of $50MM which includes $40MM related to the sale of the Courtyard JV in 3Q12
    • 2012 investment spend (incl. Gaylord transaction): $850-950MM (includes $100MM maintenance spend)
    • "The company expects to add 20,000 to 25,000 rooms in 2012, not including the pending Gaylord transaction.  Some new unit openings in Mexico, Asia and the Middle East have been delayed to 2013.  The company also expects approximately 9,000 rooms will leave the system during the year."

MAR 2Q 2012 CONF CALL NOTES - fee2

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