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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Outlook a little worse



"The steady drumbeat of negative news emanating out of Europe is certainly having an impact.  As a result, we are seeing pluses and minuses in the different geographical markets – North America is holding up reasonably well; Asia is a big plus; but Europe is a pretty consistent minus.  Overall we have seen about a 100 basis point drop in our yield projections, but we expect to offset over half of this decline with lower spending."


-Richard Fain




  • Frustrated with results
  • Caribbean continues to be solid.  Alaska holding reasonably well but has slightly underperformed. Asia revenue yields were great (had easy comps).
  • European pressures and underperformance stand alone;  cost-cutting will continue to offset the weakness.
  • Q2 like for like yields (ex deployment changes) were up 1.7%
  • Ticket yields were slightly ahead of forecasts, driven by Asia 
    • Caribbean yields were up 7%
    • Europe yields were lower but not as low as Q1
  • Onboard revs
    • Increased modestly but less than RCL forecasted
  • Booking window for NA and other non-European countries was the same YoY
  • Closer in booking windows in key European markets, particularly Southern Europe
  • Load factors improved as Q2 progressed but ended a little lower YoY
  • Q3: booked APD is lower YoY as Europe discounting has picked up
    • Alaska prices have been reduced recently, but considering a record year in 2011, the performance is still pretty good
  • Q4: hope to be yield positive; APD has been stable
  • Excluding European, FY 2012 ticket yields are expected to increase 5-6% YoY (over last 3 months, forecast has been stable)
  • Increased revolver capacity by $225MM
  • % of repeat cruisers has been slightly elevated compared to prior years
  • Capacity % impact from deployment of Mariner of the Seas to China:  large increase in Asia, small increase in Caribbean, decrease in Europe
  • A number of on board areas contributed to the positive momentum, offset by year-over-year decrease in gaming spend. In addition to Americans spending more on a year-over-year basis, they continue to improve ability to generate higher on board spend from guests in many of our priority markets.
  • Saw decreased year-over-year spend from guests from the major Southern European markets. 




  • New ship order upcoming? 
    • Are looking but in today's market, you couldn't get a ship before 2016
  • Europe has required more discounting than expected
  • Alaska has been more discounting than expected
  • Q4 guidance:  Low-single digit constant-currency yield
  • Q3 % booked are lower than what's expected based on historical data
  • Q4 % booked are better than what's expected based on historical data
  • Order book solid in 2013
  • More contraction in booking window in Southern Europe relative to Northern Europe
  • Voyager of the Seas has gotten good reception in Asia
  • 10% YoY decrease in Europe capacity in 2013
  • Not afraid having more capacity in a market (Asia) that is getting very robust rates, but those rates may be stable instead of going up.
  • 2013 European capacity growth: 1% in 1Q; 32% in 2Q; 49% in 3Q; 24% in 4Q; overall: 27%
  • FY 2012 capacity: 42-43% Caribbean, 30% Europe, 8% Asia, 4% Alaska, 15-16% other itineraries 
  • Too early to speculate when Europe will recover
  • Pullmantour:  very challenging Spanish market
    • Currently 40% Spanish customer base, down from 87% historically; some shift to South America customer base
  • Europe airfare has been an impediment for sourcing US passengers
    • But on European cruises, % of NA customers have increased by a few % points from their original forecast
    • Have been able to drive late business in Europe at a discounted rate but with good volume across all European markets
  • Less aggressive hedging on new build costs since they are bearish on Euro
  • Have been investing in information technology area
  • Caribbean yields are higher than peak 2008 levels
  • Capacity hole in Europe: Volumes need to be higher (August/Sept/Oct). They need to find that volume but believe they are finding it.
  • Marketing efforts increased in Southern Europe, doesn't really have much an impact on market share
  • FY 2013 cost impact on the 2012 deployment changes: neutral impact
  • FY 2013 not a big shift in deployment between Northern and Southern Europe itineraries.





  • "Since the April guidance, the strengthening of the U.S. Dollar has reduced the company's full year outlook by approximately $0.13 per share.  This outlook reduction has been largely offset by the reduction in bunker pricing that occurred during this same time period.  The net effect of these currency and fuel price changes is essentially neutral for the company's full year earnings outlook."
  • "Overall, booking trends have continued to normalize and are now running at levels comparable to prior year's activity."
  • "Larger than expected discounting has been required for the European season which has lowered the midpoint of the company's Constant-Currency Net Yield expectations for the year by approximately 1% point from the April guidance."
  • Forecasted consumption is now 58% hedged via swaps for the remainder of 2012 and 54%, 38%,  22% and 7% hedged for 2013, 2014, 2015 and 2016, respectively.  For the same five-year period, the average cost per metric ton of the hedge portfolio is approximately $526, $568, $619, $595 and $582, respectively. 
  • Currently has options expiring in 2013 at a strike price of $90 bbl that cover an estimated 9% of 2013 consumption. 
  • Q2 Cash+ undrawn RC: $1 billion (currently at $1.6bn)
  • The company has utilized a portion of the accordion feature on its revolving credit facility due July 2016 which increased the size of the facility from $875 million to $1.1 billion.  The company has also closed on a €365 million, delayed draw (June 2013) five-year unsecured bank loan facility.  The combination of these actions provide liquidity of approximately $600 million and has been done primarily as part of the company's refinancing strategy to prepare for bond maturities in 2013 and 2014.
  • Additionally, the company has committed unsecured financing on its newbuilds.  The company noted that debt maturities for 2012, 2013, and 2014 are $600 million, $1.6 billion, and $1.9 billion, respectively.  
  • Capex guidance:  2012, 2013, 2014 and 2015 are $1.3 billion, $600 million, $1.1 billion and $1.0 billion, respectively. 
  • Capacity guidance: 2012, 2013, 2014 and 2015 are 1.5%, 1.1%, 1.0% and 6.6%, respectively.

Save The World







In the game of inflation, you’ve got to control it enough so that there’s some kind of outright riot among the people and their government, You reach a point where food prices and oil prices become way to high for anyone, Think China is going to cut rates anytime soon? Not a chance. As a result, Chinese equities are going to have to endure a beating until we reach a point of stability that everyone is comfortable with.



A box of short-termism. All we care about is the now and not the consequences that might affect us down the road. Yes, it’s corporate earnings season and yes, company XYZ got lucky on a beat. But really, a companies are missing out there. They are not meeting consensus and whoosh – down they go. Corporate revenues are looking a lot like they were in Q3 2008. But nevermind. All we need is a little hope that Fed Chairman Ben Bernanke (who is basically out of bullets), will ease further. Then the market is A-OK and good for another 20 handle rally in the morning, followed by an afternoon selloff.



Big news out of Europe this morning. European Central Bank Chief Mario Draghi came out and said that he’s ready to do whatever it takes to save the Euro. Talk about a catalyst. Markets immediately responded positively to the news. The ECB may go and pull a Fed by going into the markets to buy bonds to quell fears over the situations in Spain, Italy, etc.




Cash:  Flat                      U.S. Equities: Up


Int'l Equities: Flat            Commodities: Flat


Fixed Income: Down        Int'l Currencies: Flat





This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.




TAIL: LONG            



SS volume accelerated in 1Q12 and employment remains a tailwind to both admissions & mix. We expect acuity to stabilize and births and outpatient utilization to accelerate out of 1Q12, while supply cost management continues as a margin driver and acquisition opportunities remain a source for upside.







We continue to expect outpatient utilization to pick up in 2H12 alongside stabilization in acuity with ortho and cardiac/ICD volumes supporting both pricing and inpatient admissions growth. Births should serve as a tailwind into year-end, recent and prospective acquisitions offer some upside to 2012/13 numbers and the in place repo offers some earnings flexibility. With European and Asian growth slowing, we like targeted domestic revenue exposure as well.

                                                                                                                                                                        TRADE: NEUTRAL






Tweet of the Day: “Wait. Las Vegas Sands did more Casino Revenue in Bethlehem PA than Las Vegas??!!” -@ThemisSal


Quote of the Day: “Be yourself. The world worships the original.” – Ingrid Bergman


Stat of the Day: Initial jobless claims fell 35,000 last week to 353,000.


FNP: Early Read Very Positive

Conclusion: Better than expected (and much better than broadly feared) numbers from our top long idea. Robust top-line numbers out of FNP. Earnings came in a few pennies better than Street estimates of ($0.13) with no change to the full-year outlook for adjusted EBITDA of $125-$140mm. Underlying comps improved across each of the brands against the toughest comps of the year with both Kate and Lucky tracking well ahead of company expectations. There’s still wood to chop here before year-end on the cost side, but let’s be clear – this quarter represents a very positive update for FNP.

  • Comps by Brand:
    • Kate Spade: Kate (50%+ of EBIT) posted an exceptional quarter with comps up +34% well ahead of our expectations and company plan for high-teens growth for the full-year maintaining underlying two-year trends north of 50%.
    • Lucky Brand: Lucky comps came in up +8% also above our expectations against the toughest compare of the year posting its second consecutive solid result vs last year when the brand really began to emerge. 1H trends here are also tracking ahead of company expectations for low-teen growth for the full year.
    • Juicy Couture: Juicy comps came in down -9%. While the two-year accelerated, this is below expectations. In what might be the only surprise in the numbers, inventories were problematic despite conservative management in 1H – apparently not conservative enough
  • Square Footage Growth: Expect upside to square footage growth opportunities to be a frequent topic of discussion in light of robust sales out of Kate and Lucky where growth will be primarily focused providing further sales upside.
  • SG&A: At 68% of sales, the cost structure remains a work in progress – one that we expect new CFO George Carrera to shed greater detail on the call. But we want to be equally clear on this as well -- this is not a cost-cutting story. Stories where cost cuts drive revenue growth are like Bigfoot. They're talked about but never seen (i.e. JCP).  FNP is investing in its SG&A line, but needs to better leverage those investments in higher sales growth.
  • EBITDA Outlook: No change to full-year expectations of $125-$140mm for the second time in as many quarters. For those familiar with the history of FNP, no change is net positive. With the bulk of profitability generated in 2H it would be premature to suggest this might be conservative, but the likelihood of this range increasing before year-end just improved.
  • Cap Structure: an improvement with excess borrowing capacity at $260mm vs. $210mm due largely to the 10.5% Notes offering intra-quarter provides FNP with added flexibility.

The dial-in for the 10am call is with pass code #99380732.

Casey Flavin



FNP: Early Read Very Positive - FNP Direct Brand Comps 1yr


FNP: Early Read Very Positive - FNP Direct Brand Comps 2yr



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