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Takeaway: We would not be long SBUX heading into earnings on 11/1

There is plenty to like but too much uncertainty to get behind this name ahead of the quarter.  Our research process is telling us to not be long SBUX for the second successive quarter. 


Starbucks reported worse-than-expected 3QFY12 earnings and we believe there is significant risk of an additional miss in 4QFY12.  We expect comparable sales to grow in line with consensus but believe that the likelihood of a substantial upside surprise is remote.   The macroeconomic environment represented a headwind for Starbucks in 4QFY12 but company-specific factors are also hampering profit growth. 



Our Stance Ahead of the Quarter


We would remain on the sidelines through the 4QFY12 earnings release.  Consensus is assuming a sequential slowdown in comps for the Americas division but we believe global macroeconomic concerns will weigh on FY4Q results and the outlook for FY13. We expect a shortfall versus sales and EPS estimates for Starbucks’ FY4Q results.





To become more constructive on Starbucks shares, as we were from March 2009 through May 2012, we would need to see management focused on a less complex web of operations.  With the core business, CPG, and the Verismo home brewer, Starbucks has more than enough growth to satisfy investors.  Increasing the number of “four-wall” concepts under the company’s umbrella is, in our view, not a promising development.


Starbucks has usurped McDonald’s as the most-loved restaurant stock among sell-side analysts.  This is not a badge of honor from the perspective of the stock price. Below are some of the key guidance metrics for the upcoming quarter and the full fiscal year 2013:

  • 4QFY12 revenue growth of 10-12% versus the street is at 11.8%
  • 4QFY12 EPS of $0.44-0.45, growth of 19-22% versus consensus of $0.45
  • FY13 targeted revenue growth of 10-13% versus the street at 11.7%
  • 1,200 net new stores – acceleration in U.S., China, possible acceleration of closures in Europe (the company has said that 25% of the store base in Europe is unprofitable)
  • FY13 EPS of $2.04-$2.14 versus consensus of $2.13, according to Consensus Metrix
  • FY13 is locked for coffee costs through 11 months at favorable prices. ~100m tailwind to operating income




The coffee tailwind is a well-documented tailwind for Starbucks.  What is less well-known is the extent to which comps have slowed and what return on investment the company has been receiving on its growth initiatives.  We believe that there is significant risk the company sets out to manage (bring down) expectations among investors ahead of FY2013 results. 


Over the long-term, we believe that Starbucks is one of the best-positioned consumer-facing companies given the growth prospects that management has outlined.  Over the near-term, we believe that expectations are overly optimistic and we would look elsewhere for exposure to restaurants on the long side.


SBUX CLOUDS IN MY COFFEE - sbux consensus



Howard Penney

Managing Director


Rory Green





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






  • BETTER:  The strength of the close-in pricing and bookings was a big surprise in Q3.  Prudent cost management also helped.  While management did not want to provide any concrete 2013 guidance, their outlook is much more optimistic than the past couple of quarters.



  • MUCH BETTER:  Significant close-in demand across all markets, including Europe, catapulted RCL to an impressive Q3 beat.
  • PREVIOUSLY:  "What we see is that we are in fact able to drive the late business at good volumes. Clearly not at the rates we would like to be commanding for these products, but we are able to drive the business. So that is coming from actually all European source markets....Volumes essentially will need to be higher on a year-over-year basis, the close-in volumes, because we have a larger capacity hole to fill in Europe because of the way that the market developed this year....and at this point, I can say that we are finding that."


  • SLIGHTLY BETTER:  the booking environment has stabilized in general.  North America and Northern Europe are on a normalized booking curve while Southern Europe booking remain "closer-in" than seen historically. 
  • PREVIOUSLY:  "Over the past couple of months, bookings have been running slightly ahead of this time last year from both Europe and North America. We have seen a shift to a closer in booking window in key European source markets, particularly those in Southern Europe. The booking window for North America and most other non-European countries is largely the same as it was at this time last year."


  • WORSE:  Load factor is trailing that of last year.  RCL mentioned a ship in Asia scheduled in early October that has only filled 60% of capacity due to the tensions between China and Japan.  It is one reason why 4Q yields on a constant-currency basis was lowered by 1%.
  • PREVIOUSLY:  "The fourth quarter is yet another story... as of the time of our last call, both load factors and APDs were running ahead of the same time last year. For the last few months bookings have been rather stable, and with only 28% of our inventory in the more volatile European itineraries we are hopeful to return to yield improvement in the fourth quarter."


  • SAME:  Load factors continue to be a little higher YoY.
  • PREVIOUSLY:  "Our order book is solid at this point, our load factors are running ahead of a year ago."

A Romney Landslide?

We hosted Professor Ken Bickers from the University of Colorado to discuss his economic forecast model.  His basic premise is that the economy will ultimately drive electoral decision making.  He looks at this on a state-by-state basis.  Historically, he has had a very strong track record historically and called each election going back to 1980 calling both the eventual winner, but also the coming very close to the electoral count. If he has partisan bias, we couldn’t discern it. His model currently predicts that Romney will win 330 electoral votes – a very non-consensus view.  The slides and presentation are in the video below. Alternatively, you can watch it on YouTube here.



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WYNN: Going Big

Wynn Resorts (WYNN) put up a solid quarter yesterday. Las Vegas Strip volumes were surprisingly strong and it’s now clear that WYNN is taking Strip share on slots and tables. The company will likely take on more market share in Macau when Wynn Cotai opens. 


The company also announced a special dividend of $7.50 payable to shareholders of record on November 7. That’s a 50% increase compared to what was paid out in 2011. Additionally, WYNN doubled its regular quarterly dividend from $0.50 to $1.00/share.  Given the hefty 3.5% yield, the increase in dividend should attract a new set of income oriented investors.


WYNN: Going Big - wynnchart

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.”

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