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




  • LITTLE WORSE:  Last quarter, HOT thought that 2012 was more likely to surprise to the upside than downside.  Given the larger FX headwinds and weakness in Europe, Argentina, Canada and greater deceleration in China, it now looks like things are trending at the mid-point of their expectation.   


HOT 2Q REPORT CARD - 7 26 2012 9 51 53 AM 



  • SAME: US RevPAR picked up to 7.9% in 2Q. Rate growth of 4.8% accounted for 60% of RevPAR growth.
    • "Primarily driven by rates, we expect RevPAR growth momentum to be sequentially stronger from Q1 to Q2." 
    • "Rate in the first quarter was roughly 50/50 and we're heading towards more like a 60%-plus rate to occupancy mix as we head into the latter part of the year."
    • "Occupancies are getting to the point where rates should begin to move more than it has to date.


  • LITTLE WORSE:  "Corporate momentum remains robust, group pace is tracking in the mid- single digits" There was a lot less discussion surrounding the strength of group bookings on this call.
  • PREVIOUSLY:  "We're now booking on the group side is clearly at a much higher rate. Recent group bookings have been at rate increases that are in the range of 7%, 8%, 9%."


  • BETTER:  HOT expects an even better outcome from 2013 corporate rate negotiations compared to the rate increases realized this year.
  • PREVIOUSLY: "Corporate negotiated rates always take a little while to catch up, but they are beginning to catch up. We've had some rate increases in the negotiated rates. The corporate negotiated rate business that we're getting this year is 6%-plus more than last year."


  • SAME:  Low supply growth continues to offset the impact of the "new normal" 1-2% economic growth.  Corporate profits remain healthy and they have had no indication of plans to cut back on travel.
  • PREVIOUSLY: "Commercial real estate loans in general and especially construction loans continue to decline. So supply is tight and it looks set to stay that way for a while, but demand in North America, Europe and Japan has continued to build. Companies are profitable and in great financial shape and they're in search of growth."


  • WORSE:  Trends in Europe must have deteriorated since April.  European RevPAR grew 2.3% in constant currency and was down 8% in actual dollars.  Expect a slow and steady improvement in the business with 3Q getting a boost from the Olympics and the strong dollar driving leisure travel from the US.
  • PREVIOUSLY: "Despite continuing concerns around the outcome of the French election or Spain's refinancing needs, we are seeing improving business trends in our key European markets. These trends would suggest that RevPAR growth in Q2 should approach 4% in local currencies from under 2% in Q1. We are currently tracking at a 4% level in April."


  • SLIGHTLY WORSE: Asian RevPAR picked up from 6.7% in 1Q12 to 9.3% in 2Q 2012, but didn't quite get to those double-digit rates that HOT had hoped for. Expect the 2H to come in at the high end of their 6-8% WW range.
  • PREVIOUSLY:  "We expect a sequential acceleration in Q2, with RevPAR growth returning to a double-digit pace."


  • BETTER:  2Q RevPAR in this region increased to 11.2% from 2.3% last quarter
  • PREVIOUSLY:  "In the Middle East and Africa, we saw big jumps in RevPAR in March, as North Africa started to lap the start of Arab Spring events of last year. However, in absolute terms, business is still weak in countries like Egypt, where the situation remains unsettled for travel. Saudi and the Gulf, on the other hand, are on a strong cyclical recovery track, and sub-Saharan Africa is delivering solid double-digit growth. As a result, we expect RevPAR growth to accelerate in this region in Q2."


  • WORSE:  Since 1Q, Latin America has lost its momentum.  It was HOT's second slowest region with RevPAR growth of 6.1%. The slowdown in Latin America was attributed to instability in Argentina, which is expected to get worse in 2H12 and continue to drag down RevPAR for that region. 
  • PREVIOUSLY: "All indications are that Latin America will remain our fastest growing region."


  • SAME:  HOT has not see any development delays in their 100 hotel pipeline. YTD signings have picked up to 30 new hotels vs. 27 last year.
  • PREVIOUSLY: "Although there have been concerns about the real estate sector in China, the pace of hotel signings and openings remains steady and strong, especially in tier two and tier three markets, where we have been focused for the past few years."


  • BETTER:  HOT closed on 60% of the condo units at Bal Harbour through 2Q
  • PREVIOSULY:  "To date, we have closed on 138 condo units, 102 this year and 36 last year. 32 units have been sold but not yet closed. As such, the project will be over 50% sold and closed by the end of this quarter."


  • BETTER:  They still have several assets where sale discussions are underway and they expect to close on a few by the end of the year.  However, management stated that they were more discussions underway with potential buyers than there were 3 months ago.
  • PREVIOUSLY: "In terms of assets sales, we are always exploring opportunities to sell our owned hotels at attractive prices to high quality, long-term owners. We have several conversations currently underway. We expect some or all of these transactions to close later this year."


  • BETTER:  HOT repurchased 2.84MM shares for $140MM during 2Q through July 25th
  • PREVIOUSLY: We have a share buyback authorization already; we've had it for a while. I think the timing of our share buyback is going to be linked more to assessment of intrinsic value than any kind of trigger around asset sales and so on."


  • BETTER:  HOT got BBB ratings from 2 rating agencies this quarter. Goal of keeping the rating through cycles remains.
  • PREVIOUSLY:  "Our goal is to stay investment grade through cycles. We're there with the next paydown. We pretty much brought our debt down to levels where we want it to be. We think, over time, the ratings will all line up at BBB."

Bearish On Pawns

In mid-July, we published notes detailing our bearish case for the pawn shops. Most notable, we were bearish on EZ Pawn (EZPW), First Cash Financial Services (FCFS) and Cash America (CSH).


EZPW recently reported its quarterly earnings and missed by 7 cents of the consensus 62 cents. More importantly, the main driver of the miss was falling gold volume and price tailwinds abating. We’ve been reiterating that pawn shops were going to have a hard time going forward with the way gold is performing.



Bearish On Pawns  - PAWNS yoychange



CSH has an even more disastrous quarter, missing revenue by 10%.  From Hedgeye Managing Director of Financials Josh Steiner:


If EZPW's quarter was bad, CSH's was a disaster.  The company's revenue missed expectations by 10%. While the earnings miss wasn't as severe, they more than made up for it in the magnitude of guidance downside. They guided to 3Q earnings of $0.95-1.05 vs. consensus of $1.26: a 20% guide-down based on the midpoint. Similarly, they guided to implied 4Q earnings of $1.06-1.41 (midpoint $1.23) vs. consensus of $1.45, a 15% guide-down. On balance, the back half of the year was just taken down by 17.5%, which is about what the stock is off by: 19%, as of the time of this writing.”


Steiner says it all. These shops relied too much on the “BUY GOLD!” boom that swept the nation and are now feeling the macro effects of a stronger dollar.


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:  While RCL remains focused on cost controls, weaker demand from Europe and Alaska is dragging down its outlook.




  • WORSE:  Q3 APDs are lower YoY as Europe and Alaska discounting has picked up while load factors remain below last year's levels.  Q4 APDs and load factors have been relatively stable.
    • "We continue to experience a slow but steady recovery in our booking patterns. Over the past four weeks though, we have seen better demand especially from the United States where year-over-year bookings have been exceeding last year's levels." 
    • "Overall, our current pricing remains in line or higher than the same time last year for all major itinerary groups except Europe."

WEAK 2Q/3Q, STRONG 4Q/1Q 2013

  • WORSE:  Q3 yields are underperforming while Q4 yield growth is slowing. Management did not want to comment on Q1 trends.
  • PREVIOUSLY:  "Not surprisingly, the second and third quarters are suffering the most. They book a great deal during the wave period and the summer is our most valuable season, especially in Europe, with less of a cushion than the first quarter, they are therefore and not surprisingly the most vulnerable. On the other hand, as we enter the fall, we appear to be turning a corner. Sailings in the fourth quarter and for all of 2013 show promise. Both remained stronger than comparables from the same time last year and I think that further validates our belief that this is a shorter-term issue."


  • BETTER:  Asia led the charge with dramatically higher yields.  Even though that region had given easy Tsunami comps, it outperformed management expectations and drove ticket revenues higher.


  • SAME:  Voyager of the Seas was well-received in China
  • PREVIOUSLY:  "The bigger story of Royal Caribbean seasonal deployment, however, is the move of Voyager of the Seas to Singapore and then China, while the ship will not arrive in Singapore until May 26, it is clear the perspective presence of Voyager in Asia has galvanized interest in Royal Caribbean in the region. Asia is in general a late booking market, so we still have limited visibility into the performance of specific sailing, but at this stage of the selling effort, we are pleased at the market's response to Voyager."


  • WORSE:  Q3 APD has been steadily trending lower since May.
  • PREVIOUSLY:  "For the summer season, our Alaska product, where we are once again operating three ships, is performing well. Bookings for our seven-night Bermuda sailings out of Cape Liberty this summer are also doing well and we are on pace to achieve healthy yield improvements over last year on both of these products."


  • WORSE:  onboard revenues came in weaker than management forecasts
  • PREVIOUSLY:  "Very strong beverage revenue, we've seen strong shore ex. revenue. Casino has not rebounded yet, but we've put programs as a whole, but we've put programs together with high rollers to help casino improve."


  • SAME:  % of repeat cruisers continues to be higher, compared with prior years
  • PREVIOUSLY:  "We are seeing a lot more hesitancy from the first time cruiser."

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I just wanted to send out a thank you note to the CEO of DNKN, Nigel Travis, for validating my research process here at Hedgeye Risk Management. Unfortunately, I was not allowed the opportunity to ask a question on the conference call this morning, but I would have thanked him personally over the phone had the chance arisen. 


I knew I had touched a nerve on the last conference call.  Two things I have learned during my career:

  1. When a management team calls out an analyst’s research as “nonsense”, the analyst is often correct.
  2. When a management team purports to paternalistically protect investors from their own analytical ineptitude, they’re usually not doing that to protect the stock from becoming over-inflated. 

Consider this quote from Nigel Travis, to me, on the most recent earnings call:


“We took a decision when we went public that we weren't going to release pipeline information. We think that's the right thing because it can be interpreted in all kinds of ways.”


On the back of some stronger-than-expected 1Q12 numbers, Travis attacked our thesis on his stock and our view that there was a lack of evidence that the company can grow in line with his guidance and the Street’s expectations.  To be clear: our thesis has, from the start, included the caveat that we can only work with the data management provides publically: the Store Development Agreements (SDA’s) on the investor relations website.  This data is limited, but the information regarding openings on the company’s investor relations website suggests a shrinking backlog of stores.  This “nonsense” thesis that we were communicating was based, in part, on the assumption outlined above in point two, above. 


On 3/19/12, we wrote: “The evidence for our view is as follows: announced new unit openings are lagging actual openings, which is leading to a decline in the backlog of potential new units being opened.  Until we are proven wrong by greater disclosure from Dunkin’, we will continue to be bearish on the company’s growth prospects per the announcements of new contracted openings by the company.”


As our clients know, our view has been based on a lack of evidence – concrete evidence – that the backlog of new unit openings was growing in line with the necessary growth rate required to meet company growth targets.  Call us crazy, but erring on the side of caution seemed most appropriate to us when valuing a stock that is being sold hand over fist by insiders while management shirked away from disclosing information on the most important component of its long term outlook.  Our stance on this stock has been solely aimed at providing a sober, transparent, and logical approach to a growth story that – to this day – is sorely lacking in transparency.  And the insiders have been selling, presumably out of a sense of civic duty to their fellow investors.


It is still a little early to say, but it seems that our thesis could be correct.  Looking at the 2Q12 numbers released today, it appears that management is likely going to be hard-pressed to meet its Dunkin’ Donuts growth targets in the U.S.  Gross openings were flat year-over-year in the second quarter, while net openings of U.S. Dunkin’ Donuts units came to 19 versus 54 expected by the Street, according to Consensus Metrix. 


The bulls have shifted from “growth” to “comps” and now have nowhere to go.  The issue of unit openings is not the end for Dunkin’ Brands.  Same-store sales missed expectations by a wide margin; meeting full-year comps estimates will require a strong sequential acceleration in two-year average trends.  If you have a list of consumer companies that is going to see a V-Bottom in two-year average trends in the back half of this year, I bet that list is short and Dunkin’ is not on it. Consensus is expecting that, as the chart on the right, below, illustrates.  Even maintaining flat two-year average trends is likely overly-bullish but that scenario, illustrated by the chart on the left, shows comps missing consensus by 190 and 270 basis points in 3Q and 4Q, respectively.   We don’t think comps are overly material for Dunkin’ Brands; it is a franchised business whose future earnings growth is primarily predicated on unit growth.  Nevertheless, we do not think the same-store sales numbers over the remainder of the year will help franchisee demand for the Dunkin’ Donuts brand, however good Mr. Travis “feels” about it.


DNKN: ALL GLORY IS FLEETING (PART DEUX) - dnkn pod 1 consensus



Howard Penney

Managing Director


Rory Green










  • Service margins increased to 110bps QoQ, attributable to the inclusion of the laser hair removal division and improved service margins in their maritime business, partially offset by lower starts in populations in their post-secondary schools segment.
  • Product margins rose 180bps QoQ, driven by mix of products sold onboard the ships
  • Q2 had a negative FX charge of $412k; unscheduled dry docks caused STNR to lose an additional 299 revenue days or $775k in Q2; YTD, they have lost 549 revenue days or $2MM.
  • Onboard spa division outperformed expectations
  • Yield management initiatives are still needed in certain geographies i.e. Europe, to drive demand and improve revenue cruise to cruise 



  • Customers are spending less in Europe than the Caribbean
  • Q2 softness in schools was the primary reason for lower outlook on 3Q
  • 31-32% product margin run rate is reasonable; better mix of NA passengers supported stronger margins in Q2
  • Tougher regulatory environment for everyone; no one is immune from this
  • School division counter-cyclical to poor economy?
    • It's possible.  Schools (9-11) have behaved in-line during bad economic times.
  • Non-spa ship productivity
    • Because of adding some new European lines, they had more non-spa ships in the mix
    • Non-spa ships tend to fall into luxury category; no material changes there
  • Q3 ship counts:  114 spa; 42 non-spa
  • Q4 ship counts:  113 spa, 40 non-spa
  • Why did land-based average weekly revenues fall in Q2?
    • some bigger properties in Caribbean and St. Regis underperformed--poor yield management along with slower consumer spend
  • FY 2012 Guidance: general economic conditions have worsened; Europe continues to pressure results


Solid Q and fairly optimistic outlook. Europe and currency will continue to drag



“We kept up our momentum in the second quarter, despite a choppy global economy. Our REVPAR grew 6.9%, with occupancy over a healthy 71%. Despite the uncertain global environment, we expect the trends we saw in our business for the past quarter to continue through the second half of the year.”

- Frits van Paasschen, CEO



  • No talk from corporate customers about cutting travel budgets. They are convinced that long term trends have not changed. Their business is much more robust than headlines suggest
  • Have seen a deceleration in China but nothing precipitous. None of their hotel projects in China have been put on hold
  • In NA they are still benefiting from tight supply
  • Occupancies in big cities are in the mid 70's, which suggest rates should continue to rise
  • The slow down in Latin America was mainly due to Argentina
  • Argentina, Canada and European owned properties hurt their performance this quarter
  • Overall 2Q EBITDA was better than they expected and even better when you include Bal Harbour
  • View that the world is filled with huge opportunity and huge risk
  • Optimism over:
    • Secular growth in travel as rising wealth in the middle class
    • Globalization of brands which should allow the strong brands to continue to get stronger, allowing HOT to continue leveraging their fixed cost base
    • Unlocking $4-5BN of cash through real estate sales 
      • Hotels, timeshare and Bal Harbour sales
      • In the last 4 years they monetized $800MM from timeshare sales and $1BN of lodging sales. Will continue to bring their owned hotels to market either one at a time or in portfolio
  • Reduced their debt and now 2 agencies have them rated 2 notches above investment grade
  • SG&A is down 11% since 2007, despite having 24% more hotels in their system 
    • To be fair they also own a lot fewer hotel rooms.
  • Asia accounts for 65% of their pipeline with China representing 2/3rds of that. 53% of their pipeline is with existing owners of HOT brands
  • Non-US members account for 44% of their SPG guests. Continue investing in their SPG program. SPG members spend more and are their best brand advocates. SPG room nights grew 12%; while platinum nights grew 17%
  • Expect to deliver on 2012 expectations. 
  • Deliquencies are back to pre-crisis levels of 2% and interest charged on loan is 13%
  • They are now rated BBB by 2 rating agencies, which was their goal
  • European RevPAR outlook:  Business is improving slowly, but steadily.  Up 3.4% in Q2 for company operated hotels. Business is holding up well because they operate in key cities. Local business is down, but there is growth in regional and foreign business. They will be helped by Olympics in London and good business in Rome, as well as the strong dollar driving leisure business from the US. Expect that RevPAR will remain steady in 3Q and maybe improve in 4Q, given the easier comps
  • China RevPAR outlook: Have 100 operating hotels in China and 100 more in the pipeline. They are having a leadership transition which is impacting their business as a lot of activity is on hold until the change goes through. North China is growing in the high single digits. South has been hurt by slow down of exports and a short term supply in balance. Total revenue in China in 1H12 is up 25% YoY. Openings are not slowing either. They have signed 30 new hotel contracts vs. 27 during the same period last year. Do not expect the trend in China to improve anytime soon. Government change will occur in September but then there is a transition period. Exports imbalances are likely to persist for the next 6-9 months. However, a hard landing is not likely given that it is a managed economy. The government has also started easing which should help stimulate the economy
  • ME & A outlook: countries impacted by Arab Spring grew over 20%
  • Latin America: Anticipate a continued slowdown in Latin America due to Argentina
  • Canada: strong Canadian dollar has hurt trips to Canada from US by 3% but trips by Canadians to the US picked up. 
  • Excluding Canada, NA grew 7.9%; Rate accounted for 60% of RevPAR growth
  • High occupancies are helping them raise rates
  • Expect that 2013 corporate rate gains will exceed those in 2012
  • Best estimate is that recent trendlines will continue for the rest of the year
  • Still expect 70-80 hotels to open this year. 
  • Europe, CAD, Argentina account for 40% of owned EBITDA and 33% of owned rooms
  • At Bal Harbour they have now completed sales from prior period and future sales will depend on new sales. Expect about $5MM of sales per quarter and expect to sell out by 1Q14 or earlier. 
  • Have several assets for sale which they expect to close by year end
  • Goal is to maintain an investment grade rating though any downturn
  • Expect to deploy excess cash to shareholders



  • Hope that they can announce some closings of assets sales by year end. Not at a point where the hotel M&A market can handle portfolios. So they are marketing several individual assets
  • In Toronto they have about 2,700 rooms. The health of the group business is weak. It used to be a great place for US business to go when the CAD dollar was 70 cents. Given the size of their hotels and the lack of group business they have no pricing power
  • Early mid-cycle is where they are now and that means that they have more time to push rate and improve mix-shift. They are continuing to rollout their yield management system which helps
  • Asian RevPAR outlook for the rest of the year. They had an easy comp in Japan which added about 100bps to RevPAR growth won't help them next quarter. 4Q they will have a benefit from an easy comp in Thailand. Expect that RevPAR will be at the high end of their 6-8% range. 
  • Negatively impact from hedging activity: Historically hedging only 50% of their Euro profit. They hedged at 1.44 coming into the year. Their guidance includes this range. $5MM impact from FX in the back half of the year
  • Is development pace slowing in China? Non of their 100 hotels in the pipeline are on hold. YTD their pace for development is up in China and overall throughout their portfolio (including signings)
  • They have more assets on the market that under active discussion now than 3 months ago.
  • If you exclude Canada from NA results (US), you get 7.9% growth. Yes Sheraton has been successful for them. They think that Sheraton is outperforming Marriott brands. 
  • Trends in their group mix have been more consistent that what MAR is seeing. They also have smaller box hotels. 
    • Their yield management systems and SPG also really helps them outperform
  • Owned hotels in US: why RevPAR is only +4.4%. Each hotels has its own market specific conditions.  Had good results on the West Coast and weaker results in DC. 
  • Some of the performance differential in brands has to do with their geographic exposure more than chain scale performance.  Le Meridian and Luxury/St Regis are more concentrated in Europe. Greece was down double digits. 
  • Group pace - continued strong mid-single digit pace for the balance of the year.
  • Reduced their opaque and lower rated business
  • Demand for the corporate base and the high end leisure traveler is strong. 
  • It will be interesting to see what happens in September, which is when transient business picks up after a seasonal lull in summer time
  • Net room growth of 4% or better for 2012, gross of 6%. 
  • How do they think about the value of their European portfolio in light of further devaluation  in the Euro?
    • Think that their European assets are in extraordinary locations where you can't build new assets. Their goal is to have their assets in good shape. They believe that their hotels will trade on a per key basis rather an EBITDA multiple. They are not going to rush their properties to market
  • Have not yet put any hedges in place for next year



 <CHART 1>

  • HOT reported 2Q Adjusted EBITDA of $323MM or $288MM, excluding Bal Harbor ($3MM above the high end of guidance)
  • RevPAR performance was in line for constant currency figures, but FX had a larger drag than HOT's original guidance:
    • WW SS RevPAR: 6.9% (4.2% in actual dollars) 
    • NA SS RevPAR: 7.3% (6.8% in actual dollars)
    • WW Branded SS Owned:  3.1% (-0.4% in actual dollars)
  • "REVPAR at Canadian owned hotels decreased 6.5% in constant dollars as group business continues to be negatively impacted by the strong Canadian dollar."
  • "Year-over-year base management fee and franchise fee comparisons were impacted by the conversion of some franchise agreements to management contracts in Germany."
  • "During the quarter, the Company signed 34 hotel management and franchise contracts, representing approximately 8,300 rooms, and opened 14 hotels and resorts with approximately 2,700 rooms. At June 30, 2012, the Company had approximately 365 hotels in the active pipeline representing approximately 95,000 rooms." 
  • In 2Q,  14 new hotels and resorts (representing approximately 2,700 rooms) entered the system. Five properties (representing approximately 1,000 rooms) were removed from the system during the quarter"
  • "Total vacation ownership revenues increased primarily due to the timing and recognition of deferred revenues and favorable trends with respect to default rates on notes receivable. Originated contract sales of vacation ownership
    intervals and numbers of contracts decreased 5.0% and 1.8%, respectively, primarily due to lower closing
    efficiency partially offset by increased tour flow. The average price per vacation ownership unit sold decreased 2.6% to approximately $14,400, driven by inventory mix"
  • Bal Harbour revenues and EBITDA were $167MM and $35MM, respectively. In 2Q, HOT closed on 45 units for proceeds of $148MM. Through June 30, 2012, HOT has closed on 60% of the inventory at BH
  • Capex: $22MM of maintenance and $70MM of maintenance
  • 2Q-July 25th buyback: 2.84MM shares at $140MM. At July 25th, $110MM remains available under the Company's share repurchase authorize
  • In 2Q, HOT "redeemed all $495 million of its 6.25% Senior Notes due February 2013. Redemption premiums and other costs associated with the redemption were approximately $15 million. Additionally, the Company prepaid a loan secured by one owned hotel of approximately $52 million."

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