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Lodging is a highly cyclical space and it tends to be an early cyclical mover.  Many investors believe that 2009 numbers are “trough” and therefore deserve a higher multiple.  For most lodging companies, especially owners of hotels, we would argue that 2010 will be a materially worse year than 2009.  However, our EBITDA estimate for MAR is only 5% lower than 2009, mainly due to the following:


  • MAR should still experience a nice benefit from room growth, as many of the hotels under construction today are already financed and will open
  • MAR owns/leases few hotels – so there is less of the flow-through issue
  • Over 50% of the rooms in MAR’s system are limited service, which is more “defensive” than Upper Upscale and Luxury segments.  Ritz Carlton represents only 4% of MAR’s system rooms
  • Only $850M or so MAR’s debt is getting refinanced in the next 3 years, with only the credit facility being likely renegotiated by YE 2010, so the mark-up on interest won’t be as painful for MAR as many other companies in the space


MAR is trading at 10.5x 2009 and 2010 EBITDA.  Consistent with the last year, we are still below the Street consensus EBITDA estimates, by 4% and 10% for 2009 and 2010, respectively.  On a P/E basis I have them at roughly 19-20x.  To put current valuation in context we looked at where MAR has traded over this last decade based on actual forward results.   See the charts below.



We believe that MAR’s P/E multiple troughed in 2008 at 14x our 2009E EPS estimate of $0.91.  Using historical achieved EPS, P/E troughed at 14x in 2003 when the stock hit $14.43.  EV/EBITDA multiples also troughed at 7.5x in 2003.  The average forward P/E ratio over this time frame was 27x.  However, if we exclude 2000, 2007 (peak take-out speculation) and 2008 (Street expectations were massively too high for 2009) the average is closer to 22x.  The average forward EV/EBITDA ratio over this time frame was 13x.  However, if we exclude the same periods as above the average is 11.5x. 


The takeaway here is that current valuations are above trough valuations and are not significantly out of line with historical multiples.  The problem though is that the road to recovery from this cycle may be slower and longer than most investors anticipate:


  •  Many of the cost cuts are not permanent
  • Occupancy needs to stabilize before ADR begins to recover and we are nowhere close to that as  Q1 is the first quarter where ADR will take a meaningful hit
  • Flow through from ADR is much worse than Occupancy
  • Higher group rates booked in early 2008 and 2007, will roll off the books in 1H09, and be replaced with lower rated AAA, AARP, airline crew, and OTA merchant bookings, which will then take a while to roll-off again when things improve
  • When most of the 5 yr 2006 & 2007 CMBS financing roll in 2011 & 2012, companies will experience a huge markup on their cost of borrow.  Same goes for financings put in place from 2006-1H2008


 While MAR looks to be one of the best positioned, i.e. most defensive, lodging companies, the sector has had a huge run.  Until occupancy stabilizes, the stocks are unlikely to sustain rallies, at least that’s been the historical precedent (see our 01/29/09 post “A GIRAFFE FROM HEAD TO TAIL”).  Given our outlook, this space should be rented for near-term catalysts and not owned.  For MAR the catalyst was Capex cuts (which we got) and improving investor sentiment.  Now that we’ve achieved a 35% move in the stock since 3/6/09, there appears to be little reason to stay with it.


EPS Revisions Challenge My Call For a Week

I’ve been noting for the past month my view that retail’s cash flow trajectory will meaningfully improve in 2H.

Last week’s earnings revisions challenged my view, as outlined in the chart below. This was largely the result of revisions at Nike, and to a lesser extent Abercrombie, and Ross Stores.

EPS Revisions Challenge My Call For a Week - 3 30 2009 6 08 41 AM

My confidence level remains high, however, as commentary from these companies are contributing to the factors that I think will cause cash flow to bounce. Again -- I am NOT making a call on the consumer, but am simply modeling that the delta in the negativity of consumer spending (less toxic is good in my model) occurs simultaneously with stabilizing gross margins, and a  cost-reduction cocktail of absolute SG&A and capex cuts. (See my March 5th note “I’m Getting Fundamentally Bullish” for more quantification).

The big question heading into 2010 will be who cut costs because they could, vs. who cut because they should. We’ll see plenty of weak companies cutting into bone this year, and they’ll be the next shoe to drop.

I’m drawn to the quality companies today who I know are investing in the right places for the right reasons, such as Ralph Lauren, Under Armour Lululemon, Hibbett, and (dare I say) Liz Claiborne. Hanesbrands also fits the bill. I don’t like those who are cutting in all the wrong places, such as Ross Stores, Iconix, Sears, Carter’s, Jones and Gildan. The challenge here is that this latter basket of companies will also show a reversal in cash flow trends, temporarily masking the damage they are doing to their base business. I’ll be working closely with Keith to game the sizing and timing on these fundamental ideas when the group looks more ‘shortable’ and/or when the near-term fundamentals for each of these names present an opportunity.

If Your CEO Ever Says This, Find a New Boss

I’m sitting here having my morning coffee going through last week’s bankruptcy filings. This quote from the CEO of Active Wallace almost made me choke on my bagel.

“The swift and dramatic downturn in the local economy had a major impact on our business in the 3rd and 4th quarters of 2008. The preemptive cost cutting initiatives that we took throughout 2008 were not enough to protect our investments...”

Ok…I’m not a retail CEO, so I don’t purport to be able to do this guy’s job better than him. But the statement referring to “cutting costs to protect investments” is flat-out ridiculous. Maybe if you cut costs and reinvest in your brand then this works. But when you cannot cut a leg off a bar stool and expect it to stand on its own.

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Bankruptcy Exposure Monitor

Yes, I know, another post about bankruptcies, but to say that Q1 2009 has been notable would understate the obvious. As it relates to bankruptcies there are two points of interest that we take note of in each filing, the companies that file and the often overlooked creditors who have capital at risk. Given the flurry of activity over the last three months, we thought it would be helpful to review the quarter in aggregate.

YTD there have been 8 retailers file for bankruptcy. As a point of reference, over the last ten years there have been up to 22 retail bankruptcies in a single year only twice, in 2001 and 2008 and so far we are on pace to top that by nearly 50%. With the number of filings mounting, it’s important to keep track as small increments can add up quickly for creditors who find themselves at risk in multiple bankruptcies. Some notables from the list creditors:

Bankruptcy Exposure Monitor - Bankruptcies09EPSImpact

Columbia and Quicksilver have the unfortunate distinction of being the only companies with capital at risk in three separate bankruptcy filings. Given that consensus estimates are $0.07 and $0.05 respectively, a couple pennies are worth noting even though we have COLM earning in the range of $0.20 in Q1.

Other creditors exposed by multiple filings include Warnaco and Hanesbrands albeit with no more than a $0.01 at risk.

Are these totals enough to sound the alarm on any of our creditors that they too may soon fall victim to the same fate, not just yet. But we’ll be keeping track and let you know if that changes.

Casey Flavin

Apparel Industry Needs More Babies!

Demographic waves tend to be just about the most predictable facet of consumption. That is, until there is a massive shock to the economic system that makes people call into question their ability to care for a new child. The birth rate has been running between +1% to +3% over the last nine years. That's big... If history is any gage, we'll be seeing the US birth rate decline starting next year. This will have close to zero impact on current results, and I fully acknowledge that the average hedgie PM would take this nugget and laugh at it given how far out it is. But if we take a company like Carter's, for example, where babywear is between 25-30% of sales, it's certainly something we can't ignore. Same holds true for Gymboree, Children's Place, and Gap (both baby Gap and Old Navy).

Apparel Industry Needs More Babies! - Birth Rate and GDP

The First Skate Retailer to Topple

Last week the Active Wallace Group became the latest retailer to file for Ch. 11. What is interesting to note is that it’s the first specifically in the skate category this year. As an online skate retailer with 21 retail locations in CA, this reflects slowing sales in what has been one of the hottest categories over the last 5 years (as well as the sad state of the California economy).

The list of unsecured creditors includes several notables in the top 20; however, the impact on a per share basis is minimal.

Nike at #1 with $1.5mm at risk, less than $0.01 per share.

Quicksilver at #6 with $515 at risk, less than $0.01 per share.

Vans at #11 with $348k at risk, less than $0.01 per share.

In 2007, skate approached 5% share of the broader footwear market outperforming other categories, but sales growth has slowed dramatically and now accounts for less than 3% thus far in 2009 (see chart). While Heelys admittedly drove part of the 2007 results, the decline we’re seeing today more than offsets that. Nike is now one of the top brands in this space (Nike 6.0 and Hurley) and the company recently noted on its call that it is a standout in its US business. Not good news for Vans (VF Corp) which is disproportionately exposed to the coast. Another nugget to lead to our bearishness on VFC.

The First Skate Retailer to Topple - FootwrMSChg Cat 3 09