UA: We're Still Negative Near-Term

Takeaway: While our short thesis played out this quarter, we don't think there's a rush to cover. There will be a time to buy -- just not now.

We agree with the market’s assessment of UA’s print, though we wouldn’t rush to cover the short just yet. There are always puts and takes with UnderArmour, but this quarter definitely gave the bears much more to chew on. The stock blew right through its TREND support, which puts the $49.71 TAIL line in play. But even then, we think that the risk is to the downside given the different characteristics of UA’s value creation. Specifically, UA’s multiple grew by 50% to about 38x over the past two years despite having problems with working capital/inventory management and gross margins. The single offsetting factor was sheer top line growth.


Now, we’re seeing the top line growth story slow down, with margins picking up the slack. That’s great. But unfortunately, the market won’t pay as much for margins as it will for top line. The top line shortfall in core apparel is particularly noteworthy, which we think is due largely to our concerns over pack-away inventories at retail, but it is also worth noting two other key factors.

1) Consumer direct revenue was up over 30% and now stands at 24% of sales. As this has grown, the impact on top line has been commensurate as UA booked the revenue as retail dollars as opposed to wholesale. Let’s look at the math this way DTC was 24% this year versus 22% a year ago. That amounts to $36mm incremental dollars. On an apples to apples basis, that amounts to roughly $18mm in wholesale dollars that would otherwise have been shipped at wholesale. This is 4 points of UA’s 23.6% top line growth rate for the quarter. Our point is not that we should rob them of this achievement. But rather that at 24%, the DTC ratio is not getting a whole heck of a lot higher if it expects to succeed in footwear and international markets. Any lack of a perpetuation in this trajectory threatens the growth rate in aggregate – not to mention a reduction in the growth rate overall.


2) International sales grew sub 2% in the quarter. The company noted that it was really +18% excluding a one time shipment a year ago to Dome, a Japanese partner. But the reality is that this was footwear, which is one of UA’s hottest growth businesses. It should be comping the comp with little difficulty.


3) One of the things that saved UA this quarter was growth in its accessories business. Accessories now stands at about 9.5% of total sales. That’s pretty meaty – ie it is unlikely to get much higher. But that’s not as big of a deal to us as the fact that accessories added more revenue in the quarter than footwear did. And that’s ANY way you look at it. Year over year, sequentially, vs 2 years ago…take your pick.   Why does that matter? When is the last time you heard anyone say “I’m in this stock for growth in accessories.  Probably never. Its about footwear and international, which are both still in their infancy. In fact, on a combined basis their revenue was only slightly greater than UA’s entire pre-tax income this quarter ($95mm vs $90mm).


The inventory position was the big saving grace, as it was down 2% versus a 24% boost in sales. That’s outstanding. But there was literally no mention of the word ‘receivables’ in the quarter. Inventories might be paramount – but the aggregate Receivable dollar figure is within $1mm of Inventories at $311mm. Inventories were down 2%, but Receivables were up 33%. In other words, working capital still came down by $74mm in a quarter where inventories were hailed as coming under control. That’s a big disconnect to us. Clearing inventories is one thing, but clearing them with more generous terms is another.   


UA: We're Still Negative Near-Term - ua ttt


Here's our previous commentary on UA explaining part of our bearishness.

UA:  We’re Getting Bearish (from Oct 12)

This company needs to beat on the top line to keep its momentum going, but we think that wind is being sucked from its sail. The sole multiple supporter is at risk based on our math.


We’re getting bearish on UnderArmour. To be clear, this is a TREND/TRADE call given concerns about the top line, and to a lesser extent, SG&A costs needed to compete in the footwear arena. We think that the long-term TAIL opportunity is largely in-tact, and if our near-term call does not play out, we’ll likely reverse course. But the underlying research is compelling enough for us to get bearish on top line trajectory.


Simply put, we think that wholesale sell-in has been growing faster than retail sell-through for too long.

  • By our math, which isolates like-for-like apparel sales by stripping out footwear, International, UA Retail, and e-commerce, UA sell-in to retail has been 20%, 14%, 20% and 28% over the past four quarters, respectively.
  • Those are great numbers. But unfortunately retail sell through was 3%, -1%, 17% and 22% over those same periods per third party POS data services.
  • The latter two data points might seem like a nice rebound, but it’s not enough.  They have not made up for the (-17%) and (-16%) shortfall witnessed at during 4Q11 and 1Q12, respectively. In fact, they added to the shortfall in sell-through.

 UA: We're Still Negative Near-Term - ua2

  • Our concern about last year lies in the amount of packaway merchandise that still needs to be sold through. During those two time periods, UA’s Gross Margins and Inventories both improved on the margin. With the sell-in/sell-through gap eroding. That’s simply not good. It suggests that excess product was pushed out to retail. 

UA: We're Still Negative Near-Term - ua 3

  • In looking at results from specialty retailers like Dick’s as well as Department stores, it’s pretty clear that they are already heavy cold-weather gear before the selling season really begins due to packaway from last year. Simply put, in the absence of excess vendor support they did not clear out goods last year at bargain-basement prices. They stuck it in boxes in the stock room. Ross Stores and TJ Maxx concur with those thoughts on inventory levels.
  • Two of our industry sources – including one mid-sized private brand – suggest that these trends are not specific to UA, but are pervasive throughout several players in the industry.
  • Basically, this threatens either/or the initial shipment into retail or the first replenishment order – the latter of which happens in the back half of October through the first half of November.
  • We’re not suggesting that revenue will be down. But simply that the Street’s 23% top line growth rate for 3Q, or its 29% rate for 4Q (which would be guidance in the release) are at risk.


Another point we’re slightly more concerned about is the success factor associated with footwear. It’s no secret that the footwear initiative at UA is slow to catch. But we think about this a bit different than most. In the end, we think that UA will realize the 6-8% share that most ‘non-Nike competitors’ steadily enjoy. The problem is that the cost of this share will be dramatically higher than the company is currently set-up for. So will UA realize up to $1bn in footwear revenue? It could definitely get there. But it could take the aggregate EBIT margin down by 200-300 basis points along the way. We think that any radical shift in expense structure will take time. But unfortunately, so will a big wad of footwear dollars.


Over the past 2 years, UA has had issues impacting margin, and those start getting easier. But all along the way, the market has looked right through ‘em due to the strength in top line growth. Perhaps it puts up good earnings numbers, but our sense is that the risk of a top line miss is not fairly represented in a stock trading at 37x next year’s EPS and 20+x EBITDA. This company NEEDS a top line beat to head higher, and perhaps even to stand still. Short interest might seem lofty at 13% of the float, but UA’s short interest has historically peaked at 3x that level.  It doesn’t give us much confidence either that management has been net sellers of the stock.


Management at the Goldman Retail Conference

“So as far as the back half of the year goes, obviously, in addition to our guidance, I think a couple of things that are important to note, is what are some of those things out there in the back half of the year that could change a guidance for us. Two of – the two biggest things we saw was obviously weather, weather plays an important part especially in the fourth quarter and coming out of a warm winter last year not only does that impact how people book their business for this winter, how they plan for this winter, but there is also some leftover stock from last year too, so how that impacts the start of this fall winter season.


So, if there is upside in the back half of the year relative to weather being colder than last year that would pretty much be in the fourth quarter for us. The other piece of that as we talked a lot about at our last earnings call, is our E-commerce business, and we talked about some challenges we were having in the front half of this year relative to our conversion rate since we launch the new site last November, and that conversion rate was below last year's conversion rate and the gap was widening during the front half of the year.


So, clear the path for E-commerce team, put some quick fixes in place, basics around speed and around easier shop-ability on the site and in the last five weeks or so, we've seen that gap narrowing now for the first time this year versus widening as far as the year-over-year conversion rate. So, that's a good sign for the back half of the year too, but again, E-commerce heavily weighted towards the fourth quarter. So, when you look at the – our guidance in the rest of this year upside, and weather upside for E-commerce business continues to improve, those would be good things for us in the back half, and that it all be weighted towards the fourth quarter.”


Read this how you want, but to us it sounds like an incrementally cautious read on 3Q with a ‘keeping our fingers crossed for a few things to go right in 4Q’ position.


Simply put, we don’t like UA at $56.60. We putting this one in the bucket of our shorts – along with M, KSS, GPS, SPLS, COH and CRI. As always, we identify the fundamentals. Keith will manage risk around the specific price. 


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



HOT 3Q 2012 REPORT CARD - hottt



  • WORSE:  Underlying fundamentals softened in 3Q with weakness primarily driven by Canada, Argentina and China.  4Q guidance is also softer.  While HOT is optimistic that the slowdown is just a pause, things are definitely a bit more uncertain today than where we stood last quarter. 


  • WORSE:  The slowdown was much sharper in China than HOT expected.  The slowdown was countrywide, with modest growth in the North and East and modest declines in the South and West.  Including the new openings, HOT’s business in China was still up 25% YoY.
  • PREVIOUSLY: “We have seen a deceleration, but nothing precipitous. Our hotels in North China continue to grow in the double digits. Eastern and Central China are growing in the mid-single digits. The South has been hurt by the slowdown in exports. Tier two and tier three cities, where we have the largest footprint among the major high-end hotel companies, are experiencing double digit growth with very strong F&B momentum... Through the first half of the year, our total revenue in China is up over 25% in local currency.


  • SAME:  While Starwood did not specifically address this point on the call, net room growth was 5.7% in 3Q and there was no indication that openings should decelerate. So we believe that the prior guidance is still intact.
  • PREVIOUSLY: “On track to hit net rooms growth in excess of 4%”


  • BETTER:  Bal Harbour closing are proceeding better than prior guidance with an expected contribution of $135MM to EBITDA in 2012 vs. prior guidance of $120MM.  HOT did not comment on sell out timing but reiterated that they are on track to meet their sellout goal of $1BN in condo sales.
  • PREVIOUSLY:  “Sales momentum and pricing remain good. We now expect the complete sales of all Bal Harbour condos by the first quarter of 2014, if not earlier.


  • WORSE: Asia Pacific RevPAR slowed to 4.3%, driven by business in China held back by a weaker exports and the new government and tighter monetary policy. Latin American RevPAR fell to just 3%, driven by a 16% decrease in Argentinian RevPAR.  Africa & ME was better though with RevPAR growth of 7% due to strong results in Saudi Arabia and Dubai.
  • PREVIOUSLY:  “As we look ahead to Q3, momentum remains good in Asian and Middle Eastern markets, as well as Sub-Saharan Africa. North Africa has tougher comparisons. We anticipate a slowdown in Latin America, driven by the worsening situation in Argentina, where we also benefited from a big soccer event last year.”


  • LITTLE WORSE: There was no comment on the transient business mix.  Group (particularly large group) was sighted as an area of weakness that’s expected to get better in 2013.  Corporate rate negotiations are on hold until post election but high-single digit increases are still expected for 2013 given peak occupancy levels.
  • PREVIOUSLY:  "High occupancies are helping us remix our transient business, raise group rates and we anticipate an even better outcome from 2013 corporate rate negotiations than the rate increases realized this year.”


  • WORSE:  HOT lowered their FY forecast to 5-6%
    • “At this point, we have no indications global companies are either restricting or cutting travel and meeting plans. As such, our best estimate is that recent trend lines will continue through the rest of the year. This underpins our unchanged outlook for 2012 REVPAR growth at company-operated hotels of 6% to 8% in local currencies. Based on results to-date, we're likely to finish somewhere in the middle of this range.
    • Given the issues in Canada and Argentina, we're lowering our owned-hotel REVPAR growth range at the high-end from 4% to 6% to 4% to 5% in local currencies and only 1% to 2% in dollars. Europe, Canada and Argentina account for over 33% of owned rooms and almost 40% of owned EBITDA.”


  • BETTER: Starwood completed the sale of the Sheraton Manhattan, W-Chicago Lakeshore and W-LA in 3Q for a net proceeds of ~+$500MM
  • PREVIOUSLY: “We remain committed to our asset sale program… We have several conversations underway, some at advanced stages. It is our practice to announce sales only when we close and when we have received the cash. We expect to close on several transactions before the end of the year.”


  • SAME: Group is still pacing in the mid-single digit range for 2013.
  • PREVIOUSLY: “On group pace, we've continued sort of our run of strong mid-single digit numbers for the pace in the rest of the year. It's been something that's actually, as we talked about before, allowed us to remix the corporate transient, or the transient side of the business, where we've seen revenue increases of sort of nearing 10% and, at the same time, we've reduced our opaque and lower-rated discounted business.”






  • Service margin lower 90bps QoQ:  primarly due to enrollment levels reductions in schools and to a lesser extent, smaller contribution from laser hair removal business
  • 3Q legal fees: 5 cent impact
  • Ex Fx, product margins declined 170 bps--due to unfavorable product mix sold
  • Med onboard spend was weaker than historical trend
  • Ship in Alaska/Caribbean performed well but not enough to offset European weakness
  • Will commence operations on Celebrity Reflection in Q4 2012
  • Land operations: product sales lower due to timing of shipments from Q3 to Q4 
  • Population growth excluding Dallas, Houston and Cortiva: -15% since the start of the year
  • Continue to make progress with Cortiva, albeit at a slower pace
  • Ideal Image: $30.5MM cash revenues; on a SSS basis, cash sales up 9% YTD.  Fewer guests than anticipated over the summer reduced GAAP revenues.  Will open 21 new stores rather than 15 stores previously (and will complete one expansion and one relocation)--will drag on GAAP earnings.  Deferred revs: $84MM (31% since beginning of year).
  • 3Q Cash:  $53.4MM
  • 4Q guidance
    • 4Q D&A:  $4.5MM (below the line depreciation $883k, below the line amortization $380k, above the line depreciation $3.5 million)
    • 4Q capital spending:  $6MM; (in 3Q, it was $6.8MM)
    • 4Q:  $190-200MM revenues; $0.70-0.75 EPS
  • 2012 guidance:  $790-800MM revs; $3.42-3.47 EPS
    • Lowered guidance due to opening of additional laser hair removal locations, weakenss in school segment, and softness from vessel sailing in Euro itineraries
  • Repurchases 320k shares ($14.4 million).  Have $7.3MM remaining under their authorization
  • 338.8 million- total equity at end of 3Q



  • 4Q guide down:  opening of additional laser hair center (15 cents), weakness in school segment (11 cents), softness in Europe vessels (5 cents)
  • Ideal Image:  less visitors than anticipated (mainly due to additional store openings) but cash sales continue to be healthy
    • September was weaker than expected; will recognize deferred revenues over the 2-yr max contract
    • October is a huge month for them; so far average treatment and appointment per day is trending up
  • Still feel lingering effects of Costa Concordia; ships are still repositioning 
  • 4Q:  Expect Caribbean/Alaska to improve a little bit in the beginning part of 4Q but definitely will not offset European weakness
  • Ideal Image:  opened up a new center in South Florida (may open a 2nd center there)
  • School division:  slow integration in Cortiva; overall, enrollments are down; the schools are all about population, the bigger the population, the better they are able to offset the fixed cost of the schools and running them.... students are not getting enough funding and loans.
  • FX impact on product margins: the dollar amount was approximately $520,000 as (indiscernible) cost of product and $380,000 gain in admin or the net of about 140 positive.
  • Ideal Image competition:  some weaker players have left with no new entrants.  No question that it is highly competitive.

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Is the slowdown seen in the quarter just a pause or is it indicative of lodging entering the next phase of the cycle?



“Looking ahead, our results will be driven by two things: first, the trajectory of the global recovery and whether it regains its momentum in 2013; and second, our ability to use our high-end, global brands, to get more than our fair share of the long-term growth in global travel.”


- Frits van Paasschen, CEO




  • It's not clear if the deceleration is a temporary pause due to the upcoming election in the US, Chinese government changeover and Euro headwind or something more permanent
  • During the quarter, the Euro situation grew more tenuous with REVPAR up 3% held somewhat by the Olympics and in Asia. 

  • Underlying growth in NA was more like 7% if you adjust for a mid-week 4th of July and shift in the Jewish Holidays
  • Africa & ME benefited from easy comps and strength in Dubai
  • Would have generated $2MM of EBITDA from the 2 hotels sold in the quarter
  • Some group bookings are on hold as customers take a wait and see approach to next year
  • Looks like construction starts may accelerate, giving their business a boost
  • Yet to see an existing hotel project stop from lack of financing
  • Bulk of their development is in Tier 2 & 3 cities 
  • There has been a drop in Chinese government business which they believe is linked to the government changeover coming in November
  • Despite decelerating growth, Chinese outbound travel is up and so is leisure travel
  • They believe that US and China are more likely to resume growth than not
  • They are working to de-risk HOT's business by reducing expenses. Their corporate headcount is 10% lower today than 4 years ago.  They are also reducing their exposure to owned and increasing their fee based revenues which are more stable
  • Completed the sale of the Sheraton Manhattan in the Q, with all 3 sales netting over $500MM in proceeds
  • Their fees should make up 65% of their earnings going forward
  • SPG consistently delivers over 50% of their occupancy. 
  • The slowdown in trends was most significant in Asia and mostly China this Q
  • Estimate that the calendar impacted the quarter by about 150bps.  Trend in the US is fine and stable as we enter 4Q, but given the elections and fiscal cliff approaching, its unlikely that things improve in 4Q.
    • If demand trends pick up, then they should see a lot of rate growth
    • Large groups are still a source of weakness
    • Expect US to be at the upper end of the 4-6% guidance range
  • They benefited from Olympics this Q.  Europe RevPAR growth will be at the low end of their guidance range.
  • Slow down in China was much sharper than the 8% they expected.  Slowdown in China was across the board. Convinced that they will recover early next year with the government changeover.
  • Expect Asia to be at the mid-to-low end of their guidance range
  • Saudi and Gulf states continue to do well with the balance of the ME suffering from the events in the papers.  Expect growth in the mid-point of the range.
  • Argentina RevPAR declined 16% in 3Q and negatively impacted Latin American RevPAR by 450bps in the Q.  The situation in Argentina is unlikely to get better any time soon. Mexico is showing strong signs of recovery with RevPAR up double-digits. Brazil, Chile and Peru have been impacted by the China slowdown but still growing.
  • Their owned hotels underperformed their expectations. Currently have 53 owned and leased hotels. As a result of renovations and other issues, only 46 hotels were in the same store set. With 30% of this EBITDA coming from four cities Phoenix, Maui, New York and San Francisco, 20% of EBITDA from Europe with more than half coming from Italy and Spain and in London you get 90% of own EBITDA in Europe. Latin America accounts for another 20% of 2012 own EBITDA with 90% of this coming from three countries Mexico, Brazil and Argentina. Finally, Canada and Australia contributed 25% of worldwide owned EBITDA.
  • Don't expect much improvement in their owned hotel performance through the balance of their year, but their cost control should be good.  Hard to grow margins with their current RevPAR levels.
  • Their base mgmt fees were impacted by FX
  • Fee and other income line will be impacted by a difficult YoY comparison in 4Q but core growth will be similar to 3Q
  • Expect to deliver another $10MM of EBITDA from Bal Harbour and expect to close over 70% of units by year end. 
  • Assets sales completed to date reduced 3Q EBITDA by $2.5MM and $8MM in 4Q
  • Expect that the 2013 RevPAR range will be from 4-7% but current trends suggest something in the lower end of that range. An acceleration in the US and China would get them to the upper end of the range.
  • Intend to maintain a leverage ratio of 2-2.5x so that they can maintain an investment grade rating
  • They are going enhance segment reporting in their next filing to give more geographic disclosure



  • Net cash proceeds from the Sheraton Times Square? Little over $500MM for all 3 sales so Manhattan is in the high $200MM's.
  • Development interest has increased so they don't see any slowdown in 2013 openings
  • Argentina impacted international RevPAR by 450bps and Canada was the other big impact on NA
  • Outside the US, there was no issue with hotel financing for M&A. In the US, there has been more financing for M&A than usual. 
  • OEH would benefit from reducing their overhead and reservations system. They have been in talks with them for 3 years.
  • This is a stage in the cycle of where asset sales make sense
  • Doesn't look like they made any incremental share purchases post their 2Q12 conference call. Won't comment on whether they were restricted. Given the volatility of their stock they are opportunitistic and like to buy when they are trading below intrinsic value
  • They are planning on running VOI for cash but have no plans to spin it out and have ways of growing that business in an asset-light fashion
  • Corporate negotiations are on hold until post elections but they are shooting for high single-digit increases since their occupancies are peak levels
  • Think that in a few years they can get to 100 Alofts through conversions
  • Group is pacing in the mid single digits for 2013.  Early indicators are good.  Outside NA group business is less important
  • Capital needs over the next few years. This year, they will end up spending less money on capex than they initially planned as some projects got delayed and pushed into next year.  Next year, they expect to spend a little more.  Timeshare spend will not be a big number.





  • 2013:  "Expects Bal Harbour to contribute approximately $30 million to $40 million in EBITDA, which is approximately $100 million lower than 2012. Asset sales completed to date will reduce 2013 EBITDA by approximately $20 million year over year and approximately $30 million on an annualized basis."
  • “We delivered another solid quarter of EBITDA and EPS growth led by continued gains in both room rates and occupancy. Global RevPAR grew nearly 5% in constant currency, despite a deceleration in the global economy. In fact, occupancy rose in all regions and is now reaching or exceeding peak levels in many markets around the world.”
  • EPS from continuing operations was $0.58
  • Adjusted EBITDA was $275 million, which included $12 million of EBITDA from the St. Regis Bal
    Harbour residential project.
  • WW SS Systemwide RevPAR (constant currency): 4.7% and 1.3% in actual dollars
    • NA Systemwide RevPAR (constant currency): 5.3% and 4.8% in actual dollars 
  • "Originated contract sales of vacation ownership intervals and numbers of contracts signed decreased 1.2% and 3.8%, respectively, primarily due to lower tour flow partially offset by a slight increase in the average price of vacation ownership units sold. The average price per vacation ownership unit sold increased 1.8% to approximately $14,300, driven by inventory mix."
  • In 3Q12, HOT "closed sales of 14 units at Bal Harbour and realized incremental cash proceeds of $59 million associated with these units. From project inception through September 30, 2012, the Company has closed contracts on approximately 64% f the total residential units available at Bal Harbour."
  • In 3Q12, HOT signed 25 hotel management and franchise contracts (~4,800 rooms), and opened 20 (~ 6,500 rooms). 
    • Of the new contracts signed 18 are new builds and seven are conversions from other brands.
    • Four properties (~800 rooms) were removed from the system during the quarter.
  • "At September 30, 2012, the Company had approximately 370 hotels in the active pipeline
    representing approximately 95,000 rooms"
  • "Starwood’s Board of Directors has declared the Company’s annual cash dividend of $1.25 per
    share, an increase of 150% from the prior year."
  • "On October 24, 2012, the Company completed a securitization involving the issuance of $165.7
    million of fixed rate notes. Starwood is contributing approximately $174.4 million in timeshare
    mortgages resulting in an advance rate of 95% with an effective note yield of 2.02%. The proceeds from the transaction will be used for general corporate purposes and the pay down of the securitized vacation ownership debt related to its 2005 securitization."
  • "Special items in the third quarter of 2012, which totaled a benefit of $33 million (after-tax), primarily related to an income tax benefit on the sale of two wholly owned hotels." 
  • "Excluding special items, the effective income tax rate in the third quarter of 2012 was 30.8%"
  • "Gross capital spending during the quarter included approximately $37 million of maintenance capital and $78 million of development capital"
  • "During the quarter, the Company completed the sales of two wholly-owned hotels, the W Chicago -
    Lakeshore and W Los Angeles - Westwood, for cash proceeds of approximately $244 million. These
    hotels were sold subject to long-term management contracts."
  • In 3Q12, HOT "repurchased 1.6 million shares at a total cost of approximately $78.7 million.  As of September 30, 2012, approximately $360 million remained available under the Company’s share repurchase authorization."


Takeaway: Strong close-in bookings and controlled costs helped RCL deliver an strong quarter. No 2013 guidance, but RCL feels good about next year

Strong close-in bookings and continued controlled costs helped RCL deliver an impressive quarter. Without providing 2013 guidance, RCL felt optimistic on 2013.



"The company noted that while it is very early in the 2013 bookings cycle and visibility at this time is limited, the company is encouraged by the trends so far.  For the year 2013, booked load factors and average per diems are both slightly higher currently than at this same time last year. This is particularly encouraging in light of the fact that these prior year comparisons relate to bookings before the Costa Concordia incident which occurred in January 2012."  


- Richard D. Fain, chairman and chief executive officer




  • Satisfied by results
  • Fuel/FX provided 3 cent benefit
  • Exceeded expectations in all regions including Europe, in spite of all those pressures from Southern Europe e.g. Spain
  • Fairly stable bookings environment.  Early 2013 bookings are encouraging.
  • Will move Celebrity Reflection (just over 3,000 berths) to Med in Summer 2013
  • Sunshine 1 project is two years away
  • Half of the $0.06 reduction was due to timing and marketing costs and will be incurred in 4Q
  • 3Q early extinguishment of debt (3 cent loss): Repurchase of Eurobond (Jan 2014)--$7MM charge when they brought them back at par
  • 3Q ticket yields: Europe -5.4%. Ex Europe, + 2.6%
  • 3Q onboard yields: +3.5% 
  • Demand environment relatively steady; bookings for last 3 months up 4% YoY
  • 4Q:  load factors slightly lower YoY but APD up YoY. Caribbean leading with Europe down slightly
  • 2013 capacity:  +1.3% (greatest increase from Asia-Pacific region)
  • 2013:  still expect challenges particularly in Southern Europe but other regions should offsett that weakness
  • 4Q CC guidance lowered by 1% due to loss revenue on early October ship in Asia stemming from tensions between China and Japan; it was one sailing with 60% load factor.
  • 5-year gross CAGR: +3%
  • 2013 Revitalization:  Enchantment of the Seas, Serenade of the Seas, Legend of the Seas and Brilliance of the Seas




  • Tough Q1 2013 comps:  Hope for a normalized year; APD is running ahead but load factors are slightly behind
  • Costa Concordia has affected 2012 yields by 3%.
  • More normalized booking curve for North American and Northern Europe market; Southern Europe booking curve has contracted
  • 2013 27% Capacity for Europe: Western Med 13% (-20% YoY), Eastern Med 8% (-9% YoY) and Northern Europe 6% (28% YoY)
  • Onboard:  saw strength in gaming, retail, and shore excursions
  • There might be very slight upward pressure in terms of the itineraries on fuel consumption but generally in fairly stable environment
  • Cost expenses:  improvements in all categories
  • New ship build outlook:  slower pace than in the past; do not have a specific target number of new ships per year 
  • EICA new regulations:  came in effect Aug 1, 2012 but the more significant cost burden based on sulfur requirements won't come until 2015
  • ROI expected on new Oasis ship:  no specified threshold but expect comparable performance from other Oasis ships.
  • 25% of European cruise capacity came from North America.  Asian customers also helped fill the gap for European cruises.
  • 2013 NCC:  not ready to give guidance on costs, couple of areas they are watching--may have modest increases in IT, insurance...pockets of pressure but pretty controlled environment
  • In hindsight, had held on to European pricing longer than what they would have liked
  • Europe in 2013 still a very large unknown
  • Order book sold in 2013 has been higher than any year since 2008... aka best visibility since 2008
  • TUI continues to perform very well both in guest satisfaction and results   
  • Capex outlook:  Slight bump up in installment payments if they complete Oasis order; other items to consider: IT revitalization, and revitalizations of the vessels




RCL 3Q12 CONF CALL NOTES - rcl11111

  • "The strong third quarter certainly validates our confidence in our business model. Strong close-in demand and our focus on costs drove substantially better results than expected.  I am especially gratified that we are still seeing price increases in a year marked by so many external pressures"

  • "Close-in bookings for the third quarter across most itineraries — including Europe — were stronger than anticipated... NCC excluding fuel were also better than anticipated.  Approximately 200 basis points of the Net Yield improvement and approximately 220 basis points of the NCC excluding fuel increases during the quarter relate to previously announced deployment initiatives and changes to the company's international distribution system."
  • "As the company anticipated in February, the tragedy in Italy had its biggest yield impact in the second and third quarters of the year.  The effect of the incident on bookings has continued to wane and fourth quarter 2012 Net Yields are expected to increase approximately 1% on both Constant-Currency and As-Reported bases.  Excluding previously referenced deployment initiatives and changes to the company's international distribution system, Net Yields for the quarter are expected to be approximately flat."
  • RCL is "engaged in negotiations for the possible construction of an Oasis-type newbuild that would be delivered in middle to late 2016.  While the company has not entered into any agreement at this time, it hopes to do so before year's end.  The new ship is expected to cost less on a per berth basis than either of the first two Oasis-class vessels."
  • "Forecasted consumption is now 58% hedged via swaps for the remainder of 2012 and 54%, 45%,  25% 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 $522, $568, $623, $610 and $582, respectively."
  • "As of September 30, 2012, liquidity was $­­­1.9 billion... the company has taken a number of actions this year to augment liquidity in advance of its 2013 and 2014 scheduled debt maturities, including increasing the size of its revolving credit facility due July 2016 by $233 million and establishing a €365 million 5-year unsecured delayed-draw bank facility.  More recently, the company further bolstered its liquidity through a new $290 million 3 ½ year unsecured bank facility."
  • "In part, this additional liquidity was used for the early extinguishment of €255 million (or approximately 25%) of the company's €1.0 billion senior notes due in January 2014."
  • "The company also has committed unsecured financing for its remaining newbuilds.  The company noted that scheduled debt maturities for 2012, 2013 and 2014 are now $600 million, $1.5 billion and $1.5 billion, respectively."
  • "Based on current ship orders, projected capital expenditures for 2012, 2013, 2014 and 2015 are $1.3 billion, $600 million, $1.1 billion and $1.0 billion, respectively." 
  • "Capacity increases for 2012, 2013, 2014 and 2015 are 1.4%, 1.3%, 1.0% and 6.5%, respectively."

JCP: America’s Fashion

Hedgeye Retail Sector Head Brian McGough pointed out an interesting fact about JC Penney (JCP) yesterday. With JCP opening these individual shops within its stores, we wonder if the company knows how Americans really dress. We’re talking about the postman in Ohio and the auto worker in Detroit; middle class, blue collar, hard working Americans who do their clothes shopping at places like JC Penney. 


JCP: America’s Fashion  - JCPfashion


With the debut of the Izod Shop inside JCP this week, it appears that JCP will have to be aggressive with pricing in order to sell some of the fashions it’s carrying. Take a look at the photo above and ask yourself: would a blue collar John Doe worker in Michigan wear a top like this? McGough explains:


The new Izod shop opens a discussion for JCP’s customer acquisition cost rising faster than revenue and competitive pricing pressure.

·         We like much or what JCP is doing to its merchandise right now, no means a change in tone for us

o   Our call has never been about product, the cost associated with changing around a retailing strategy by such a startling degree, and the extent to which JCP will wake several sleeping giants (KSS, Macys, Gap) with its aggressive pricing strategy which will ultimately come back and haunt them

·         The reality is that the cost of customer acquisition is going up very dramatically

o   It’s hard for this product to have such broad appeal to the people that they already count as customers

·         The punchline for JCP is that the revenue delta will improve - but it won’t outstrip the painfully eroding cost delta

o   That’s bad for JCP. For others like Macy’s, Kohl’s, and Gap, it means that JC Penney is – come hell or high water – bringing more product into the US to sell at what it thinks will be very sharp everyday low prices

o   The thing that people miss is that 100% of this product WILL SELL. It’s just a question as to what price it sells

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