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HedgeyeRetail: SSS = Shrinking Sales Sample

Takeaway: Notable weakness across the Department Store complex.


The biggest callout of this morning’s Retail Sales day is the simple fact that this is a legacy process and one that isn’t likely to be in practice a year from now. TGT announced that January will be its last monthly sales report just two months after SKS went dark. We’re now down to 16 companies compared to 21 this time last year. More notable is the size of the parties departing the practice (TGT, JCP, DDS, SKS, HOTT) which accounted for 34% of the SSS sample this time last year. This monthly exercise is clearly losing its relevance.


Back to the results, which were weaker compared to last month as largely expected with 9 companies coming in ahead of expectations compared to 8 misses – a notable deceleration from the favorable 15:1 August mix. Here are a few callouts worth noting:

  • What catches our eye is the distribution of results within retail. Apparel retailers came in mixed with a positive skew, Broadlines (COST/TGT) came in clean ahead of expectations, while Department/Dollar stores fell short across the board with the sole exception of SSI.
  • The off-pricers (ROST/TJX) continue to outperform and were the only companies to raise their outlook (though TJX had keep prior guidance in check due to an unexpected pension charge).
  • KSS’s bet on taking on inventory to drivetraffic clearly hit a snag in execution.
    • The fact that Q3 expectations weren’t tempered as a result sets un unrealistic bar in our view. Sept comps were the toughest of the quarter, but Oct is not much different implying a substantial acceleration in 2yr trends to hit guidance of +0%-2% - not likely.
    • Moreover, with higher inventory levels we think SG&A is the lever that can get KSS to their EPS for the quarter not gross margin upside – not dissimilar to last quarter. The trend in earnings quality of late is concerning.
    • Lastly, the fact that KSS’ top competitor is hemorrhaging over $3Bn in share and it’s comping down is just embarrassing.
    • To that end, the slight miss at Macy’s despite a more favorable setup is less than impressive while GPS is reminiscent of the kid in the corner at a holiday party stuffing chocolates in their mouth.
      • Aside from the off-pricers, GPS has arguably been the greatest benefactor of the JCP retailer stimulus which it has propped up its US Gap and Old Navy business. Our estimates suggest that GPS may have realized as much as a 3pt lift to total comp of in 1H, which would account for the majority of 1H growth. This is another quarter or two away from being fully realized.
      • Comps rolled across all concepts with only Old Navy improving on a 2yr basis (Mr. Johnson your fruit basket is in the mail). This matters with Old Navy accounting for 33% of sales, but that tailwind is decelerating.


HedgeyeRetail: SSS = Shrinking Sales Sample - SSS Chart




Takeaway: RevPAR may be moderating faster than expected

Management surprisingly bullish but we would fade that


"Pricing power continued to improve in the quarter as hotel occupancy levels approached prior peaks. Looking ahead, we expect 2013 worldwide constant dollar REVPAR to increase at a mid single-digit rate despite moderate economic growth in many markets around the world. We are particularly bullish about our prospects in North America"

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




  • Our 3Q was terrific. EPS was 4 cents higher than mid-point expectations. 
    • Favorable residential branding fees and termination fees contributed an extra penny.  
    • G&A line was benefited by 2 cents from better cost control and net litigation settlement. Lower than expected work out costs added another 3 cents.
    • Offsetting the above benefits, higher taxes and lower gains due to an asset impairment hurt them by 2 cents
  • Transient RevPAR was up 6%, largely driven by rate.  In particular, MAR saw stronger demand from technology and professional services companies.
  • Meeting planners spent more on F&B and have more last minute upgrades
  • Saw a double-digit RevPAR growth in: Boston, Philadelphia, New Orleans, Orlando and Los Angeles. 
  • Manhattan RevPAR rose 5% despite more supply
  • DC saw a 5% increase in RevPAR largely due to strong leisure and group demand
  • RevPAR in the ME benefited from easy comps and strong results at their Red Sea results
  • Asia Pacific saw much stronger business in Hong Kong, Tokyo, Indonesia, and Thailand
  • Incentive fees in NA more than doubled.  16 properties that didn't earn fees last year contributed $2MM of fees this quarter.
  • G&A: Lower energy costs and continued efficiency improvements
  • Continued to build market share in the US as measured by rooms.  According to STR, they have 10% of open rooms in the US and 20% of the construction pipeline.
  • 4Q outlook/guidance commentary: 
    • Quarter will have more of a benefit from business travel
    • Group booking pace is up almost 9%.  However, the election and a mid-week Halloween will likely negatively impact close-in bookings.
    • Europe:  expect a low single-digit increase in RevPAR, reflect economic weakness and absence of special events
    • Caribbean:  Low single-digit RevPAR growth; seasonally slow with only modest leisure demand
    • M&E:  Group business was surprisingly good last year and the comps are more difficult. Forecasting mid-to-high single digit RevPAR growth
    • Asia Pacific:  Forecasting mid-to-high single digit RevPAR growth
    • Fee revenue guidance assume lower re-licensing fees
  • Issued bonds given the low yields.  Increase their interest expense by $4MM in 4Q.
  • 2013 outlook: 
    • Assume that there will be some solution to the fiscal cliff
    • Government announced flat per diems.  Luckily, their business is strong enough that they can replace most of this business with higher rated business.  They still expect DC RevPAR to grow mid-single digit next year.
    • Low supply and peak occupancy level positions them well to drive higher rates
    • Meeting planners and transient guests are booking earlier and in some cases for multiple years
    • Expect NA to be steady as she goes, representing 75% of their fee revenue
    • Europe represents 9% of their fee revenue:  difficult event comps, supply is increasing faster than the US in some cities where they have distributions.  Expect flattish constant dollar performance in 2013.
    • Asia:  2013 RevPAR should reflect higher supply growth in some cities and lower inbound travel from Europe. RevPAR to increase in a mid-high single digit range.  In 2012, this region accounted for 9% of fee revenue.
    • Caribbean & LA: mid-single fee growth in 2013.  Region represents 5% of their fees.
    • ME: Assuming mid-single digit constant dollar RevPAR growth in 2013.  Region represents 2% of fees.
  • Expect hotel industry operating margins won't return to peak levels until at least 2014-2015
  • Transactions for properties are increasing.  Good opportunity for conversions.  Expect conversions to account for 50% of room openings.
  • Most of the 13,000 rooms they signed this Q will open between 2014-2016 and about 50% are outside the US
  • Welcoming the Essex House back to Marriott. They owned the property until 1994. It entered the system in September and is currently under renovation.  


  • Both Salesforce One ("SFO") and Group exposure is helping the Marriott brand in NA outperform.  They are 5 quarters post roll-out of SFO.  They are seeing great results from their efforts.
    • Hedgeye has gotten a lot of negative feedback on SFO from franchisees
  • GET's challenge is getting economies of scale around reservation systems.  Those will be the easiest places to get savings.  Fee potential of those hotels is very strong.
  • Why is the outlook for 2013 below their 3 year outlook of 6-8% given a few months ago?
    • 6-8% is a relevant range for their "model" 
    • As they get closer to 2013, they are on balance a bit more cautious then they were this summer in Beijing.  Particularly on GDP growth. Thinking 2%-ish GDP growth is in their forecast now
    • What they are seeing in the US is still very encouraging related to demand and corporate business, ability to push rate
  • China openings are about stable to where they thought they would be.  About 5 hotels opened this Q. They do see some opening slippage in Thailand and India, although it's unclear that those are related to the economy or hotel specific.  None of them are cancelled projects though.
  • Essex House guarantees:  Imply that they believe that they can get back to peak levels.  40% of visitors since being added to their systems were MAR Rewards members. Their relationships with meeting planners and databases should drive significantly more business to that property. 
  • Incentive fee growth:  Talked about a 22-28% CAGR a few months ago.  No guidance on incentive fees for 2013.  Expect that 4Q incentive fee growth will be lower than what they saw in 3Q given lower international RevPAR expectations. 
  • Booking window expansion?  Bookings in Q3 in the US for 1-year forward periods were down about 5% but bookings for 2 years out were up 10%.  Nothing to get alarmed about, it means that they are getting more capacity constrained and customers are booking further out. They are about 3% behind on RevPAR from 3Q07 and most of that is rate driven.
  • Seeing a modest increase in demand from their special corporate customers but they are obviously very early in the negotiating process
  • Forward group bookings and feedback on corporate negotiated rates give them confidence on achieving 5-7% RevPAR growth.  Better mix also goes into that calculation.
  • Group is about 40% for the MAR brand, so that mix impacts overall RevPAR for the brand.  Some markets that are more transient dominated like NY are influenced by strengthening dollar and increased supply.  Demand for Transient still looks good for next year.
  • The 7% increase in group bookings is really like 7.5% so it's really close to the +8% they saw last Q
  • The management business is more Group reliant and more concentrated in urban markets.  That's why their results are a little stronger than the franchised portfolio.  
  • Lower G&A in the quarter and read through for 2013:
    • They saved a penny through cost discipline
    • Saved 3 cents on the work-out (a one-time item) - they didn't anticipate this outcome. 
    • Expect a 3% increase in G&A YoY 
    • In the 4Q11, they had a $5MM one-time item that's helping the comp.
  • They wrote down an investment in a partnership by $7MM because values dropped
  • Group nights on the books are about the same as this time last year.  About 2/3rds of business should be on the books for 2013 at the end of the year.  Suspects that they may be 1-2% above when the year ends. 
  • Special Corporate is about 12-15% of their US Marriott brand business. 
  • They are still, on balance, pleasantly surprised about the numbers coming out of Europe. It's possibly that they keep chugging along at this pace for next year, but the loss of Olympics and other special events will cost them about 2%. 
  • How do they think about leverage?  Same: 3-3.25x.  They like repurchases over dividends because it gives them the ability to adjust capital returns based on the environment. Even though expectations are modestly reduced for 2013, they don't see a major shift that would make MAR change their leverage targets.  They are "modestly" a little less bullish.
  • NYC:  They think that NYC will perform in-line with other top US markets.  On the negative side, supply growth is on the high side. They do think that they should be able to absorb the new supply coming online.
  • What to expect about hotels leaving the system?  They think that 1.5% of the system is the right kind of deletion number going forward. There are different reasons for hotels leaving the system. They are comfortable having hotels on the low end leave the system.  Last Q they took out 4 hotels in Thailand. They took out 200 rooms from a hotel in Beijing because the owner wanted to convert some of the rooms to residential. This Q, Doral Miami left the system because they were going through a bankruptcy and they received a substantial termination payment. 





  • In 3Q12, MAR completed the sale of its equity interest in the Courtyard joint venture resulting in cash proceeds of $96MM and a $41MM pre-tax gain
  • At the end 3Q, MAR's "worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled over 120,000 rooms, not including the 8,100 rooms from the acquisition of the Gaylord brand and hotel management business"
  • In 3Q, Marriott added 35 new properties (4,874 rooms included 1,400 conversions & 1,600 international rooms) and MAR signed nearly 13,000 rooms.  Thirteen properties (3,103 rooms) exited the system during the quarter." 
  • Repurchased 9.6MM shares for $35MM during the quarter. 
  • "For comparable Marriott Hotels & Resorts properties in North America, group room revenue increased 8% in 3Q" with ADR up 3%.
  • "Transient REVPAR rose 6% with strong last-minute retail demand and reduced discounting."
  • "We expect 2013...North American systemwide REVPAR to increase 5 to 7 percent in 2013"
  • "Negotiations for special corporate business are already underway and we are targeting room rates to increase at a high single-digit rate."
  • "Group revenue on the books for 2013 for the Marriott brand in North America is up over 7% with rates up nearly 4%"
  • "We expect to add 28,000 rooms in 2012, 30,000 to 35,000 rooms in 2013 and 90,000 to 105,000 for the three-year period from 2012 to 2014. Our market share of hotels continues to grow around the world.”
  • "Base management and franchise fees rose 9%... reflecting higher REVPAR at existing hotels and fees from new hotels, as well as $7MM of deferred base management fees recognized in the quarter related to the sale of the Courtyard joint venture."
  • "In the third quarter, 28% of worldwide company-managed hotels earned incentive management fees compared
    to 24% in the year-ago quarter."
  • "Owned, leased, corporate housing and other revenue, net of direct expenses, totaled $26MM....The $9 million decline reflected a $7MM decline in termination fees and a $2MM decrease in residential branding fees."
  • SG&A & other declined 8% to $132MM, reflecting a favorable litigation settlement, partially offset by higher legal expenses, netting a $5MM favorable impact. 
  • The $41MM gain on the Courtyard JV sale was partly offset by a $7MM impairment charge on investment
  • Capitalized interested totaled $7MM compared to $5MM last year.

Chinese Rebar Vs Brent Crude

The spread between Chinese Steel Rebar and Brent Crude Oil is narrowing. Essentially, the chart illustrates how overbought crude oil is right now with respect to demand for rebar. 


Chinese Rebar Vs Brent Crude   - REBAR

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Keith added BYI to our Real-Time Positions at $48.34.  BYI has a bullish formation with TRADE support of $46.91 and can trade up to $51.31 in the TRADE immediate-term.



After our meetings in Vegas last week and touring the the G2E show this week, we are positive about BYI's existing content and impact and its development pipeline.  Management was very bullish about their new content and also about the outlook for all segments of their business. 


This historically reel spinning slot supplier displayed mostly video content at G2E that has apparently been getting great feedback from customers.  Remember that approximately 80% of units shipped  in North America are video and unbeknownst to most investors, BYI’s recent video slot shipments have also been around 80% of its total.  So their video content is already driving higher share recently, and this will likely increase their high teens overall share.  This is not your father’s Bally Gaming.


The stock has done well, certainly relative to its competitors.  However, the valuation is not excessive and forward estimates look like they may need to go higher.  We are not making a call on the September quarter – we’re essentially in-line.  However, we think 2013 estimates might be too low.  Consensus for BYI’s FY2013 is $3.17 and company guidance is $2.95 to $3.30.  Shipments to Western Canada and Illinois in 2013 could exceed expectations and combine with continued market share gains to push earnings toward the higher end of management's guidance and maybe above.



October ECB Presser: The Action of Inaction

Takeaway: ECB on hold and Draghi is über confident that he can control risk with the OMTs. We think this attitude is misplaced.

Positions in Europe: Long German Bonds (BUNL)


After ECB President Mario Draghi made his big central bank splash last month the Outright Monetary Transactions (OMTs) programs to buy “unlimited” sovereign bonds of Eurozone members at the bank’s discretion, little was said in today’s press conference in the form of an updated outlook on the economic conditions of the region. There was no clarification to when the OMTs may be activated, on the scope and conditions for the ESM to recapitalize banks, or on the oversight structure of a discussed banking union (that is if the ECB will head a supervisory board or not).


You can find Draghi’s Introductory Statements to the press conference related to inflation, growth and monetary outlook here.


With a unanimous decision the ECB governing council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively.


On the OMTs, Draghi’s Q&A language seemed to suggest that the program will not be issued in the next weeks, and once again underlined the importance that for the ECB to acquiesce to buying a country’s bonds it must first reach any number of pre conditions (mostly fiscal consolidation) with the country. In so many words he stated that most European countries that would be eligible for the OMTs have both a reasonable debt maturity schedule and debt load, so they’ll not have to use the OMTs given their “open” market access. Further, Draghi said that the OMTs are not a replacement for open market access, meaning that a country that cannot freely issue its own debt is also not a country that the OMT will consider.  So here Draghi is giving a nod to Portugal and Ireland. [Note: this week Portugal did complete a bond swap of 3.76B EUR, purchasing bonds maturing in 2013 and selling bonds maturing in October 2015. This was the country’s first buying since it took a bailout last year].


We believe that Draghi’s OMTs comments present too cavalier of an attitude towards the brewing risks across the peripheral. While we don’t think he’s unaware of the broader risks, he seems to believe that he can blanket the risk so long as he has the OMTs in his back pocket.


Our call remains that there are great risk across the Eurozone ahead, especially in an environment of growth slowing, inflation rising, and economic misses on the back of completely compromised and incorrect economic assumptions from governments. To this last point just last week the Spanish government stated that its GDP would be -0.5% in 2013, while just today Bank of Spain Governor Luis Maria Linde told parliament that GDP would contract -1.5% in 2013, and added that the deficit may be missed.  You think!


October ECB Presser: The Action of Inaction   - cc. ecb rates


Matthew Hedrick

Senior Analyst

California: Running On Fumes

Los Angeles and other California cities are running out of gasoline due to a shortage of supply in the area, driving prices 45 cents higher to $5/gallon at some stations. It doesn’t help that some major refineries at Chevron (CVX) and ExxonMobile (XOM) are under both planned and unplanned maintenance. 


Tesoro (TSO) stands to benefit from the shortage in the near-term as the ANS/USWC 3-2-1 crack is at $50/bbl (see below). The massive spike that took it from under $30/bbl to $50/bbl is where the money is. Short-term bonuses aside, the pain at the pump could lead to negative backlash from the press for TSO at a time when the company is trying to acquire a California-based BP refinery. Should the FTC block the deal, TSO’s stock will likely take a meaningful hit. 


California: Running On Fumes  - LAgasolineprice

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.48%
  • SHORT SIGNALS 78.35%