• run with the bulls

    get your first month

    of hedgeye free


FDX: Inflection in Express Margins Visible

Takeaway: FDX Express may have passed the trough in margins, with improvements likely in FY 4Q/FY 2014. FedEx Ground & Freight performed well.


FDX:  Inflection in Express Margins Visible


  • Inflection in Express Margins:  Given the cost reductions that are already underway, such as a ~2% drop in FTE head count, FedEx Express is probably past the trough in margins on an adjusted basis.  While there is some uncertainty around FY 3Q Express margins, Alan Graf commented that “you'll see it in Q4” on the conference call. 

FDX:  Inflection in Express Margins Visible - fdx marg


  • Express Margin Matters:  FedEx’s competitors have operating margins that are roughly 5-7 points higher than FDX’s, by our estimates.  Structurally, FedEx Express should be able meet or exceed the competition, in our view.  The FedEx Express division has ~26 billion in revenue, giving margin expansion significant bottom line leverage.  While a multi-year project, the potential upside is significant.
  • Ground Gains Ground:  The margin at ground declined, partly due to Sandy, fuel surcharge lag, and capacity additions ahead of a very strong peak volume season.  Those should be temporary factors and underlying volume gains looked healthy.  We expect FedEx Ground to be a growth driver for FDX as the division wins share from UPS and benefits from growth in e-commerce. 
  • FedEx Freight:  We were surprised by the profit growth at FedEx Freight.  We have generally dismissed the potential of this business because of the challenging competitive dynamics in that market.  The results in 2Q suggest that the Freight division may be a more relevant factor than we had previously assumed.
  • Just Getting Started:  FedEx remains one of our top long ideas.  As FedEx Express implements its cost reduction plans and FedEx Ground continues to win share in a growing market, we see meaningful upside potential over the next year or two.  Our base case fair value range for the shares is $120-$150.  For additional information, please see our November 8th Express & Courier Services Black Book.



Jay Van Sciver, CFA

Managing Director

120 Wooster St.

New York, NY 10012



Rise Up: Athletic Footwear

With recent volatility in the athletic footwear retail names, this week’s athletic footwear sales came in better on the margin despite a third straight week of consecutive industry sales declines. Importantly, performance categories where Foot Locker (FL) and Finish Line (FINL) are over-indexed were up +7.4% on the week compared to the broader industry down -3.7% reflecting a sharp rebound from last week and a return to a HSD growth trajectory. Nike, Jordan and Under Armour all gained share this week. We remain positive on NKE and FL and cautious on UA near-term.


Rise Up: Athletic Footwear - footwear1


Rise Up: Athletic Footwear - footwear2

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Housing: Living The Dream

Housing data over the past several weeks has been very strong, indicating a recovery in the sector that’s long overdue. However, recent housing starts data is relatively weak when compared with last month’s numbers. Overall housing starts for November fell 3.0% to 861k from an downwardly revised 888k in October. October was revised down by 6k from 894k; total housing starts are up 25.7% year-over-year.


Housing: Living The Dream - housing1


Housing: Living The Dream - housing2


Housing: Living The Dream - housing3

The Bigger Picture

Client Talking Points

Retail Kings

JCPenney (JCP) is a retail giant that accounts for 8-9% of total US apparel retail. They’re a huge player that has had one heck of a ride during 2012. CEO Ron Johnson has become a focal point for many investors as they scrutinize what he’s done with the company turnaround thus far, but there’s more to the story. JCP has hemorrhaged market share and in turn, companies like Macy’s (M), Kohl’s (KSS) and Gap (GPS) have picked up business from JCP defectors. While they put up solid growth, JCP is taking a beating. CEOs at these companies won’t admit that JCP is helping them grow their sales and business. 

Take It To The House

The housing market has really exceeded expectations in terms of growth and recovery over the past three months. Existing inventory continues to drop, home prices are rising and some areas that were hit the hardest back in 2007-2008 are on the road to repair; Mortgages are also rising along with refis thanks to low rates. With today's housing starts number falling less than expected, it's clear that housing is a sector that is on the mend and has the potential for plenty of upside. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Our competitors are neutral to bearish on the name ahead of earnings, but we think they’re missing the bigger picture. We think concerns over the shoe cycle rolling over are overdone. With R&D in the mid-teens, NKE has the ability to drive the ‘sneaker cycle’ in a case of “the tail wagging the dog”. We also think $NKE is a candidate for releasing a special dividend when they report EPS next week.


Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


Margins are in a cycle trough as the USPS is on the brink. FDX is taking more share in the U.S. and following the recent $TNT news flow we think $UPS is in a tough spot.

Three for the Road


"Market Up, $AAPL down, just another day" -@Keeneonmarket


"Democracy is the theory that the common people know what they want and deserve to get it good and hard." -H.L. Mencken


US Housing Starts Fell 3% in November to 861,000. Building Permits rise 3.6% in November.


In preparation for CCL's F4Q 2012 earnings release Thursday, we’ve put together the recent pertinent forward looking company commentary.



Carnival Corporation & plc Declares Special Dividend of $0.25 (11/16)


Carnival Corporation & plc Orders New Ships for Its Holland America Line and Carnival Cruise Lines Brands (10/26)

  • A memorandum of agreement has been signed with Italian shipbuilder Fincantieri for the construction of a 2,660-passenger ship for Holland America Line scheduled for delivery in fall 2015 and a 4,000-passenger ship for Carnival Cruise Lines scheduled for delivery in winter 2016.  The total cost for the two vessels combined, which includes the U.S. dollar denominated contract price and all owner's costs, will be approximately$195,000 per lower berth. 



  • "In June, we entered into additional zero cost collars for 2014, 2015, and 2016. We now have zero cost collars in place that cover approximately 38% of 2013's consumption, 29% of 2014's consumption, 24% of 2015's consumption, and 15% of 2016's consumption."
  • "Through the third quarter, we repurchased 2 million shares for $67 million. Currently, there is $265 million remaining under the repurchase authorization."
  • "Looking forward, our operating companies will continue to do an excellent job, finding ways to reduce costs for 2013. However, there are a few unique factors in 2013 that will be difficult to totally overcome, which will push our unit costs higher...These unique factors alone will drive our unit costs up 1.5% to 2%. Therefore, I am expecting overall unit costs, excluding fuel, to be higher in 2013 compared to 2012."
    • To begin with, we are expecting that Costa will fill their ships in 2013, which will lead to higher food and other unit costs associated with this higher occupancy. This will simply be a reversal of the occupancy-driven unit cost reduction in 2012. 
    • Our insurance costs will be higher in 2013. 
    • We are anticipating charges relating to a closed multiemployer pension plan for certain British officers and crew. The multiemployer pension plan accounting rules require us to expense our contribution to unplanned deficits when the invoices are received."
    • Our increasing emerging market deployment for Japan by Princess, for China by Costa, and for Australia by Carnival Cruise Lines will also increase our costs. 
  • "On a fleet-wide basis, excluding Costa, at the present time advanced bookings over the next three quarters are behind last year, at slightly lower prices. However, booking patterns have recently strengthened, and the occupancy gap has closed considerably, still not early fully closed but it's closing."
  • 1H 2013
    • "Lower year-over-year EAA occupancies are more significant for the Continental European brands, Costa, AIDA, and Ibero, which were more affected by the events of this past January. However, when we fully cycle through January of 2013, we expect to see occupancy comparisons improve. Having said that, we are forecasting that EAA pricing for the first half of 2013 will continue to experience a gradual decline as we build occupancies. Of course, EAA booking patterns are also feeling the effects of the sluggish European economies and we expect that to continue in 2013. A very positive sign is that during the last six weeks EAA bookings have been running significantly higher for the fourth quarter of 2012. So, we are seeing strength in EAA bookings, with the bookings trending to closer in dates."
    • "On a fleet-wide basis, for the first half of 2013, we are forecasting lower revenue yields in the first quarter and higher yields in the second quarter. The anticipated increase in second quarter yields results from an increase in ticket yields for both our North American and European brands against the easier comparisons to last year's second quarter. As a reminder, until we cycle through January of 2013, the revenue yield picture will be challenging."
  • 4Q 2012
    • "Fleet-wide capacity in the fourth quarter is expected to be 3.2% higher than last year. 3.9% for North America brands, 1.3% for EAA brands. Fleet-wide pricing, and this excludes Costa, is lower than a year ago on slightly lower occupancies. There is very little inventory left to sell in the fourth quarter."
    • "North American brands are 43% in the Caribbean, slightly higher than a year ago; 14% in Europe, the same as last year with the balance in a variety of other itineraries. North American brand pricing is lower than last year with similar year-over-year occupancies. Caribbean pricing is flat versus a year ago, and Europe itinerary pricing is lower versus last year. Pricing for all other itineraries taken together is slightly ahead of a year ago."
    • "EAA pricing in the fourth quarter is lower versus last year at slightly lower occupancies. This excludes Costa. Pricing for Europe cruises, which represent 61% of EAA itineraries, is lower and for all other itineraries taken together, pricing is flat. Costa's occupancies across all itineraries have caught up with last year but at lower prices. We do expect, however, that Costa's year-over-year revenue yield performance in the fourth quarter to improve from the third quarter."
  • 1Q 2013
    • "Fleet-wide capacity for the 1st quarter of 2013 is expected to be higher by 4.1%, 3.5% in North America and 5.1% in EAA. At the present time, fleet-wide occupancies are lower than a year ago with pricing slightly lower versus last year."
    • "For North American brands, they are 65% in the Caribbean, about the same as last year; at 13.5% is Asia-Pacific, up about 2.5 points from last year, and the balance is in various other itineraries. North America brands taken together, occupancies and pricing are slightly lower year-over-year. As reported in our last call, pricing is higher for all but one of the North American brands, but slightly lower in total probably due to itinerary changes and mix for that one brand."
    • "As previously mentioned, revenue yield comparisons for first quarter 2013 versus first quarter 2012 will be tougher given our strong first quarter North American yield performance in 2012. Caribbean pricing is slightly higher than a year ago, Asia-Pacific pricing is lower. Pricing for all other itineraries taken together is lower. As to EAA brands in the first quarter, EAA is 24% in Europe itineraries versus 19% the prior year, 18% in the Caribbean, down from 22% in the prior year, 24% in Asia-Pacific versus 21% in the prior year, and 18% in South America, which is about the same as last year."
    • "On a fleet-wide basis, EAA brand occupancies are behind last year, with slightly higher pricing excluding Costa and slightly lower pricing when Costa is included. Although pricing and occupancy for Costa's bookings in Q1 are lower on a year-over-year basis, the year-over-year price differences from the third and fourth quarters of 2012 are narrowing. Caribbean and South America pricing is slightly higher than a year ago, and Europe and Asia- Pacific pricing is lower. On a fleet-wide basis, we are currently expecting that by the time the first quarter closes, revenue yields will come in lower than the strong first quarter of 2012 primarily as the result of the lower EAA brand pricing."
  • 2Q 2013
    • "Fleet-wide capacity for the second quarter is up 3.2%, 2.3% for North America, 4.5% for EAA brands. At the present time on a fleet-wide basis, local currency pricing is slightly lower than a year ago with occupancies running behind last year. Similar to the first quarter, the second quarter comparisons are against the prior year, which at this time had stronger pricing. Because of the fall-off in bookings beginning last January, we expect second quarter occupancies and pricing to show gradual year-over-year improvement as we fully cycle through January 2013. However, I should also caution that it is still early in the booking cycle, and you should not read too much into the second quarter booking picture at this time."
    • "For North American brands, they are 53% in the Caribbean versus 56% last year, 13% in Asia-Pacific versus 10% last year, with the balance in various other itineraries. For North American brands taken together, occupancies and pricing are slightly lower, Caribbean pricing is slightly higher than a year ago, Asia-Pacific pricing is lower than a year ago, prices for all other brand and itineraries taken together are lower than a year ago. EAA brands are 59% in Europe, up from 53% last year with the balance in various other trades. EAA brand pricing for Europe cruises is lower than last year and pricing for all other EAA brand itineraries taken together is flat versus a year ago at lower occupancies."
    • "Although occupancies and pricing for the second quarter are lower than a year ago, we do expect to see a catch-up when we fully cycle last January's incident. And while it's still early in the second quarter booking cycle, as I mentioned earlier, because of easier comparisons we do expect to see an improvement in revenue yields beginning in the second quarter for both North America and EAA brands by the time the second quarter closes."
  • "We are expecting that Costa Cruises will swing back to solid profitability in 2013 after a very challenging 2012. Based on consumer research, the brand perception in each of Costa's major markets is gradually improving. So, we are greatly encouraged by the resiliency of the brand. Beginning in the second quarter of 2013, we expect Costa's revenue yields to nicely increase year-over-year against these easier comparisons for the last year's second quarter. We are very pleased with the progress that Costa has made, and our expectation is that Costa's financial performance will continue to improve as we move through 2013."
  • "In 2013, we have two ships scheduled for delivery, the AIDAstella, or AIDA brand in Germany will be delivered in March of 2013.  In late May, we take delivery of the Royal Princess, the first new ship for the Princess brand since the Ruby Princess was delivered in late 2008....Bookings for the Royal Princess, which begins sailing next summer, have been very strong."
  • "Fleet-wide capacity for 2013 is expected to increase by 3.4%: 4.1% in Q1, 3.2% in the second quarter, 3.8% in Q3, and 2.4% in the fourth quarter."
    • "North American brands will be up 3.3% and Europe brands are up 2.8%. The Europe brands' growth is in the German market with the addition of the AIDAstella. Capacity for other brands in Continental Europe and the U.K. is actually down. Australia and Asia capacity is up 8.5% as we continue to drive capacity growth cruise markets with the addition of the Costa Atlantica to Costa's Asian fleet in the spring of 2013 and Princess's opening of a new beachhead in the Japanese market with the Sun Princess later in 2013."
  • "In order to keep demand going, we have been and will continue to have a fairly heavy spend in promotions and sales. That seems to be driving the business. And that's been going on for quite some time. It really hasn't changed. That will vary by brand. Some brands experiencing more demand right now, other brands a little bit slack demand depending on the markets that they're in."
  • "For certain brands it's still pretty close-in. You're starting to see some evidence of it pushing out more recently because of the recent increase in bookings over the last quarter. But it's still closer-in than it has been historically. And that's been the pattern. We're seeing it more in the European brands, but we're also seeing a little bit of it, but not quite as much, in the American brands."
  • "Clearly, we expect occupancies to get back to more normal levels for the Costa brand. But I think we're also expecting increase in pricing because of the easier comparisons. But a good chunk of what we lost was in 2012... was occupancy because....we lost all the bookings during wave season once it started for Costa and they didn't really get back into the market in any significant way until later on in the spring and then still not in a very significant way. So it was a tough year for marketing for Costa.  But we're starting to see the turnaround, but we won't start to really see it in the numbers until the second quarter of 2013."
    • "The occupancy drop was 5% for the year, but it was over 11% and almost 6% for the second and third quarters. So it was very significant occupancy hits in the second and third quarters and third quarter obviously would be most important....we're virtually flat in the fourth quarter with occupancy."
  • "I'd say on a normalized basis because we had a couple of credits last year from guarantee payments in the fourth quarter of last year, so if you actually look at the as-reported numbers we included in our forecasts onboards would look more flattish to down, but we have had steady increases all year long and we've been very pleased with that and it's essentially across all of the major categories. We've seen increases in bar, we've seen casino, shore ex and shops and those four categories make up about 80% of our onboard, so we are very pleased."
  • "I would say that U.K. and Germany has held up better than we expected in the last two conference calls I would say a little bit, while Italy, France and Spain struggled."
  • "We've had some itinerary port cancellations. We only have, I think if you look at 2013, about less than 10% of our capacity calling in those kinds of ports and most of it is behind us for 2012. The peak of it is generally in the third quarter. So it hasn't been much of an issue today. We do have one ship that Costa has, a small ship, operating next year in the beginning of the year in the Red Sea and that could be an issue if this continues much longer."
  • "We like the European demographics. We like the market. We think the market is still considerably underpenetrated relative to other developed markets, so we like our investments in Europe from a long-term standpoint and once we get through these difficult economic challenges that we're experiencing, especially in Southern Europe.... I think we'll start to see some stabilization and some very positive results for the company longer-term."
  • "You have to remember also that Costa will operate next year with three less ships than they had this time last year. Because we sold the Marina and Allegra and we know what happened to the Concordia. So even if they do very well, they're not going to have the revenue from those three potential ships."
  • "When you look at the fourth quarter, the onboard and other yields are down considerably from the third quarter because of all of the fourth quarter items that we had last year that I mentioned before in onboard and other."
  • "We're working very hard to reduce consumption and we believe that we can continue to do that at significant levels, and I think next year we'll do it
    again is my perception...we're looking at 3% for the year."
    • "There's a lot of retrofitting of equipment on to the ships to reduce consumption – power consumption. Just more sophisticated controls, fan systems and so on. And also, where the opportunity comes up, we can change around itineraries a little bit to get some reduction in fuel cost. So, there's a variety of things that we're doing."
    • "Also, I should mention that from a metric standpoint, as we add ships to the fleet, the newer ships are designed for lower fuel consumption. So, we're seeing some marginal benefits in those numbers from that as well."
  • "The booking curve was a little bit closer than historically was the norm. Does that mean you're outside of those numbers you've given us in the past about 55% to 75% next quarter out booked, or is it sort of still at the bottom end of that?
    • "We're at the bottom end of the numbers that we've historically given you."
  • [Costa back to normalcy timeline] "They get the capacity back at the end of 2014, so that would give them the opportunity really of getting back fully in 2015, but it's going to take some steps as Howard said. It's going to take two or three years."
  • [2013 cost guidance] "So, net, you're probably looking at 1 to 1.5 points on top of flat to half of inflation."
  • "On an annualized basis you're probably looking at an ECA impact of, let's just say, $50 million to $55 million and probably a third or 40% of that was in this year. So, you've probably got an incremental of $30-odd-million next year."