AXP: Growth Slowing

American Express (AXP) is experiencing the pandemic sweeping the financial world known as #GrowthSlowing. Using data from First Data, we’ve seen Amex credit volumes decline on a year-over-year basis. The company also faces headwinds in the form of a slowdown in consumer spending and tough comps for the month of September.


As for the Bluebird partnership with Walmart (WMT) that was announced yesterday, this is a positive for AXP. It’ll give the company access to the high-growth debit card market and revenue from fees associated with the card.


AXP: Growth Slowing  - Amex vs. First Data quarterly normal


AXP: Growth Slowing  - spendtrend Qrtly YoY normal

WWW: Deal Done, See Upside

Takeaway: Accretion projections re PLG raised - update on core biz next week. We continue to like this name.

With the PLG acquisition now complete, management is taking up accretion expectations ahead of next week’s earnings call. We’ve been writing since the announcement back in July that accretion projections look conservative – and think they still are. The question remains how WWW’s core business is faring, which we hit on in our note “WWW: Opportunity Knocking” re last month’s preannouncement (included below). We’ll get the update there Tuesday (10/16).

The bottom-line here is that we think European weakness is likely to stabilize and start reaccelerating as the company realizes incremental earnings from the PLG business over the next 2-3 quarters and investors start looking at ~$3.50 and $4.25+ in EPS in FY13 and FY14 respectively as the Street takes estimates higher (the deal is not yet in consensus numbers). WWW has a solid management team and a global platform to leverage its growing portfolio of brands. We continue to like this name. One of our concerns is the timing of the deal at what might be a peak in the boat shoe cycle. This is about the only factor keeping us from putting this name on the ‘love’ side of our ledger.

Here are a few callouts re this morning’s call:

  • Accretion projections were increased by $0.10 to  $0.35-0.50 (from 0.25-0.40) in F13 and $0.60-0.80 (from 0.50-0.70) in F14.
  • Dilution of $0.25-$0.30 during the stub period in the remainder of F12 reflects the timing of the deal closure post higher volume PLG selling periods in August and September.
  • The composition of accretion factors have shifted to reflect higher non-cash amortization and interest charges that will be more than offset by net synergy and higher revenue and profit growth expectations.
  • In a positive update on PLG, the business had very strong BTS results with full year expectations now for the portfolio to post revenue and profit growth in the double-digits after reporting +8% revenue growth through 1H.


Our comments from 9/6 note “WWW: Opportunity Knocking”:

We've been working more and more on WWW since the PSS acquisition, and while today's pre announcement by no means is positive, it does not change the underlying reason why we've been warming up to it. It draws attention to risks in Europe, which we probably under appreciated. But we're seeing downward revisions in next year's EPS below a level we think the company will earn.

Consider the following:

  • WWW’s European business has been a drag on performance for several quarters now and continues to be. Underestimating this headwind has been a big miss by management and has lead to earnings disappointments in each of the last two quarters for the first time in over 4-years. WWW is not alone as the rest of retail has suffered a similar plight. While this underperformance is not new news, continued weakness is coming in below exectations and that’s not good for near-term results – we get that.
  • It’s worth noting,however, that EMEA was already running down double-digit in Q2 so it’s not clear yet if there’s incremental weakness, or simply a delay in sales reaccelerating. We expect the company to elaborate on this later today.
  • EMEA accounts for ~25% of revenues and a similar if not slightly greater portion of WWW’s earnings. Relative to our expectation for Q3 EMEA sales to reflect improvement coming in down –HSD, this update impacts revenues by an incremental $6-$10mm in the quarter and $0.15 in EPS for the year. At historical multiples (~14x EPS), we’d expect this to impact the value of the stock by ~$2/share near-term.
  • Furthermore, once the PLG deal closes (early Oct), EMEA will account for closer to 15% of revenues. With less than 10% of the PLG business coming out of Europe, we expect distribution expansion alone to reaccelerate sales in Europe.
  • Outside of Europe, the base business is positive and improving with U.S. wholesale and retail both posting positive quarter-to-date performance. In addition, revenue compares getting increasingly more favorable over the next three quarters as the company laps slower European demand and the timing of military orders in 1H.
  • The margin setup also gets more favorable ahead. WWW took it’s medicine last quarter clearing excess fall/winter product. While this accounted for a -200bps gross margin hit, it also resulted in WWW’s sales/inventory spread turning positive for the first time in 10 quarters – very positive for gross margins headed into 2H.

Continued weakness overseas begs the question regarding the timing of the PLG deal to be completed in early October. While it will likely tarnish the timing suggesting an offset to what might be an eroding base business, we expect WWW’s base business to stabilize near-term and continue to post top and bottom-line growth in the single-digits and double-digits respectively.

More importantly, the positive impact of the PLG acquisition on NewCo is still largely underappreciated and outweighs this latest delta. While the company continues to guide to $0.25-$0.40 and $0.50-$0.70 in EPS accretion, we expect closer to $0.50 and $1.00 in F13 and F14.

To be clear, this incremental weakness out of Europe is unfavorable on the margin, but is not material enough for us to alter the positive outlook we have on the intermediate-to-longer term upside in earnings. We’re shaking out at $3.45 and $4.30 in EPS for FY13 and FY14 well above consensus, which still does not fully reflect the pending acquisition. All things considered, we’d be buyers on weakness this morning.

WWW: Deal Done, See Upside - WWW S



NYSE Volume Continues To Fall

Anyone actively participating in US equities will tell you that market volumes have been abysmal lately. Broker-dealers have been getting crushed, including the bulge bracket banks as market volumes continue to drop. When volume isn't there, brokers aren't making money and that puts a strain on any company with a capital markets business.


The year over year chart shows that volume in 3Q12 was down 41% YoY, partly attributable to a tough +12% comp in 3Q11. Nevertheless, this is the largest YoY decline in volume in the last three years. On a sequential basis, volume was down 17% in 3Q12.  


NYSE Volume Continues To Fall - volume QoQ normal



NYSE Volume Continues To Fall - Volume YoY normal

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Buyem: SP500 Levels, Refreshed

Takeaway: Keep moving – markets are.



Fortunately, I can’t call today’s note by any politician’s name – it’s just another signal that we are tagging the low end of our risk range.


Across our core risk management durations, here are the lines that matter to me most:


  1. Immediate-term TRADE resistance = 1464
  2. Immediate-term TRADE support = 1444
  3. Intermediate-term TREND support = 1419


In other words, keep moving – markets are.



Keith R. McCullough
Chief Executive Officer


Buyem: SP500 Levels, Refreshed - SPX

Golden Week In Macau

Macau’s Golden Week took place last week and put up decent average daily table revenues (ADTR). ADTR fell in September compared to August, but overall, the story is that gaming volumes are solid but comps are tough. For those of you who are unfamiliar with Golden Week, it is a seven day Chinese holiday which attracts lots of tourists; Macau welcomed 390,683 visitors on the first four days alone. Visitation through Golden Week was up 9% year-over-year (that is an apples-to-apples comparison) and we have reports of strong floor traffic. This bodes well for high margin Mass gaming revenues.


Golden Week In Macau  - macau4 normal


In preparation for HST's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.






  • "We continue to be encouraged by the positive trends in group business. Group bookings in the quarter for the remainder of the year increased 9%.... and the average rate on those bookings rose by more than 6%. Total bookings for the remainder of the year are now more than 7.5% ahead of last year's pace, and the overall rate for the third and fourth quarters has increased well over 2%, indicating revenue improvement of 10%. We're also seeing the positive booking activity extend into 2013 in both demand and rate, indicating that our group hotels are benefiting from increased business spending and should continue to perform well for the remainder of this year and next."
  • "On the disposition front, we have one smaller asset under contract, which is expected to close in late summer, and we are also actively marketing several additional properties which we expect to close during the fourth quarter. While the sale market is difficult to predict, the guidance assumes we complete incremental sales in the $300 million to $400 million range by year-end." 
  • "It is worth noting that we are seeing great results at our three recently redeveloped hotels: the Chicago O'Hare Marriott, the Atlanta Perimeter Marriott and the Sheraton Indianapolis, where RevPAR is running better than 35% ahead of pre-renovation levels."  
  • "During the quarter, we completed the renovation of the rooms at the New York Helmsley Hotel as a part of the conversion process of this hotel to the Westin Grand Central and have also decided to renovate the lobby and create a new restaurant/bar outlet in the front of the hotel which should be complete by early fall." 
  • Regional RevPAR outlook:
    • "We expect Philadelphia to be a top performing market in the third quarter due to strong group and transient demand, which should allow us to drive pricing."
    • "We expect our Chicago hotels to underperform our portfolio in the third quarter due to lower levels of citywide and group demand when compared to the third quarter of 2011."
    • "We expect our Boston hotels to have a strong third quarter."
    • "We expect our Atlanta hotels to underperform our portfolio in the third quarter due to renovations at the Ritz-Carlton Buckhead and the Four Seasons."
    • "We expect our San Francisco hotels to continue to perform very well in the third quarter as strong demand will allow us to continue to drive rate."
    • "RevPAR for our New York hotels increased 4.8% due to growth in ADR. Results were negatively impacted by the second and final stage of the rooms renovations at the New York Marriott Marquis and the Sheraton New York and a rooms renovation at the W Union Square....We expect our New York hotels to perform better in the third quarter."
    • "Our Miami and Fort Lauderdale hotels struggled in the quarter as RevPAR declined 20 basis points....The weakness was due to less transient and group demand. We expect our Miami and Fort Lauderdale hotels to perform better in the third quarter due to better group bookings."
  • "We continue to see improvements in catering, meeting room rental and audio-visual revenues, as well as reductions in food and beverage cost as a percentage of revenue."
  • "Looking to the rest of 2012, we expect that comparable hotel RevPAR will be driven more by both occupancy and rate growth, but rate growth should be increasingly more important throughout the year. The additional rate growth should lead to solid rooms' flow through even with growth in wage and benefit cost. We expect the positive trends in group demand to continue which should help drive growth in banquet and audio-visual revenues and good F&B flow through."
  • "We expect unallocated cost to increase more than inflation, particularly for sales and marketing where higher revenues will increase cost. We also expect utilities to decline slightly for the full year."
  • "We expected a property tax increase of roughly 8% to 9% this year. At this point, we expect an increase in the 6% area as we have been successful in reducing some of the assessments."
  • "Taking into consideration the acquisition of the Hyatt DC and the expected term loan and the related use of proceeds from the term loan to repay approximately $400 million of debt, our outstanding debt will increase approximately $100 million to roughly $5.3 billion. We will have approximately $760 million of capacity in our credit facility and approximately $150 million of cash and cash equivalents."
  • "We will certainly be pushing for higher pricing next year to reflect the more competitive market conditions."
  • "If trends hold the way they are now, we would probably do a little bit less in special corporate or have fewer special corporate accounts next year – or at least fewer special corporate accounts with less room availability, because we will be recognizing the fact that, number one, we've got more group business on the books, we have higher occupancy and we really ultimately would like to be able to push even more of our business into those more highly rated corporate and premium categories."
  • "We are starting to see an ability to negotiate better cancellation penalties, better attrition clauses and overall better contracts. depends a lot on the hotel....I think what we're seeing this year is ultimately a slight increase in attrition and cancellation fees on a year-to-date basis compared to what we had last year."
  • [2012 group business booked] "It's slightly north of 90%, maybe... 91%, something like that."
  • [3Q vs 4Q REVPAR growth] "I don't know that we necessarily see a big difference in trends between the quarters right now."
  • [Acquisitions environment]  "I'd say expectations have moderated a bit. But clearly we're seeing more activity, more opportunity right now than we did in the beginning of the year, and I think it doesn't surprise me in some ways that that would happen. I think conditions are better. So we didn't try to predict the number of acquisitions that we would get done, but we certainly still are looking to be active. And I would still say that at the end of the day, for the full-year, it is our intent to be a net acquirer as opposed to a net seller in 2012."
  • "I think what we're finding on wages and benefits right now is that we're probably looking at our overall wages and benefits kind of increasing somewhere a little bit north of 3% over the last quarter."
  • "We'd like to buy existing full-service there, because we still feel very good about the overall opportunity in Brazil. And on the select service side, we think that matches up well with the sort of emerging wealth that's happening within the country of Brazil..... I think we could see some incremental investment in some other select service hotels in a couple of the major markets within Brazil. Nothing necessarily imminent, but we are looking at some opportunities there."
  • "The new supply in India is picking up a bit. It's certainly nowhere near the level of what we've seen in China, but I'd say right now, we have a cautious outlook on India."
  • 2H vs 1H Europe REVPAR:  "We generally would expect it to be in line with what we've seen in the first half of the year."
    • "The one market that's underperformed year-to-date has really been Brussels. But we have a sense that that will do a little bit better in the second half of the year." 
  • "We do intend to be an active seller over the next two and three years. And as we are consistent with what we've described in the past, a number of these suburban assets, both in core and non-core markets and airport locations, leaving out the ones that are sort of directly attached to the airport, those are the hotels that would be high on our priority list in terms of hotels that should be sold."

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