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RETAIL: Straight Out Of Comping

The recent trend with retailers is that many of the big boys haven’t increased guidance in a meaningful way. Despite double digit comps at Macy’s (M), Kohl’s (KSS) and Nordstrom (JWS), guidance was hardly raised as the aforementioned players head into Q4 earnings in late February. 



RETAIL: Straight Out Of Comping - GBB



We think the lack of earnings power is due in part by promotional activity. Big discounts after the holidays, combined with gift card redemptions are the likely catalyst for companies commenting that the first part of the month was stronger than the second. Still, this is a much better than having bloated inventories heading into the Spring season, where comps will be tough. The chart below illustrates performance by price point. This month is the first time in three years that ‘Good, Better, Best’ has been inverted such that Kohl’s came in on top, then Macy’s, then JWN. 

S&P 500: Crushing Commodities

Over the last three months, the S&P 500 (SPY) is up +7.85% while the CRB Commodities Index, a broad index that measures 19 different commodities, is up a mere +2.8%. The PowerShares DB US Dollar Index Bullish ETF (UUP) is down -1.04% during the same time period. The catalyst for the upside in stocks and downside in commodities? Growth. As growth continues to stabilize, we’ll continue to see commodity prices fall and stocks rise. 


S&P 500: Crushing Commodities - CRBINDEX

BG – Big Miss On Risk Management, Still Prefer ADM

This was one of those quarters where BG’s risk management process “didn’t get it exactly right”.  This goes directly to one of the more consistent comments that we hear from investors regarding the company – that the company’s risk management activities can make an entire quarter’s earnings go away.  That appears to have been the case this morning as the company reported EPS of $0.57 per share versus consensus of $2.36.

While these quarter do tend to pop up every once awhile with BG, we think that the company is likely positioned for a solid 2013 and we continue to like the theme of global agricultural processing – getting the crop from where it’s grown to where it’s needed.

In the short-term however, we continue to believe that ADM represents the superior way to play that theme, for a few reasons:

  1. More leverage to the US crop and the potential for higher yields and increased acreage relative to ‘12
  2. Name still remains under owned
  3. Valuation support on a price/book basis

BG – Big Miss On Risk Management, Still Prefer ADM - ADM price to book


Longer-term, we have concerns about the size of the capital investment that ADM has made in corn ethanol, a business that we believe may have long-term structural issues, preferring in this instance BG’s exposure to sugar ethanol.  However, in the wake of a very disappointing earnings result at BG versus a modestly positive result (admittedly against very low expectations) at ADM, we think ADM makes more sense in the near-term (1-3 months).


Call with questions,



Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Early Look

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Core metrics a little light but cash flow and balance sheet are exceptionally strong


“The year looks to be somewhat stronger than 2012, as the uncertainty we saw in major world economies
is showing signs of giving way to stronger demand growth. Beyond next year into the foreseeable future, we are bullish about the long-term outlook on the global high-end lodging industry."


- Frits van Paasschen, CEO



  • 2012 was a year of uncertainty, which lead them not to expect an uptick in travel in Q4.  Customers were holding back and in wait-and-see mode during the quarter.
  • Based on supply and demand dynamics, we should see strong RevPAR growth over the next few years in NA
  • In 2012, total system revenue in China was up 27%
  • Argentina and Chile are a drag on the Latin America region
  • Owned hotel portfolio: don't read too much into the poor results this quarter. Given the small size of their portfolio, there is bound to be a lot of variability in results.  Also sold the Aloft in Lexington.  Average multiple has been 16x on their 10 sales this year.
  • Fees accounted for 62% of their ongoing EBITDA before SG&A
  • Some people argue that their balance sheet is too strong and that they should return more cash to shareholders. However, their strong balance sheet helped them achieve a record low interest rate on their latest bond issuance of just 3.125%.
  • They will continue to use dividends and share buybacks to return cash to shareholders
  • Continue to see a choppy world and an uncertain global economy. At the high end of their guidance they expect a recovery in some markets like China and NA (over the 4Q)
    • Expect higher room rates in NA and Europe where demand outstrips supply
  • Delta partnership:  First type of partnership of its kind giving top customers of each brand equivalent status benefits across both brands. 
  • In 2012, SPG total hotel revenues grew 12% and 16% from their Elite members. Getting more business from their best customers is a high return spend. 
  • Relocating their management team to Dubai for the month of March. They had a lot of good results from their China relocation last year- spurred more deal signings, better working relationships within their management, helped them understand the need to localize their offerings. 
  • While RevPAR came in the low end of their range, good cost control and other factors helped them achieve good results
  • Do not believe that the RevPAR slowdown throughout the year in 2012 was structural but rather driven by:
    • Chinese government transition and the impact of a Chinese slowdown on the surrounding region
    • US Presidential elections
    • European structural issues in the South driven by austerity
    • Market specific issues in the Middle East and Argentina
  • Their 2013 guidance assumes accelerating RevPAR growth
    • Asia: 5-7% (middle part)
    • Europe:  5-7% (low part)
    • ME:  middle part of range
  • Only European companies and financials are talking about cost cuts
  • Business momentum in January is good:
    • NA: Jan +7% at company operating hotels. Rooms sold in opaque channels are declining. Group pacing is trending in the mid-single digits.  Booking cycle continues to lengthen.
      • Expect a mid-single digit increase in corporate rates
      • RevPAR growth: 6-7% as the year progresses
    • Europe: benefit from easy comps in markets like Greece and Eastern and Central Europe.  
      • Small Q because of the weather
      • Expect a better year for the region
      • Supply situation remains good.  Customers are cautious and sensitive to range.
      • Forecast RevPAR at or below the low end of their range
    • Asia Pacific: 
      • Chinese RevPAR was +6%
      • Expect the rate of growth to pick up as the year progresses; expect it to ramp to the high end to above their guidance range
      • All 3,900 rooms are now open at Sheraton Macau and they are sold out for CNY
      • Indonesia and Thailand are booming - expect double digit growth
      • Growing sentiment that things in India are getting better - mid-single digit growth is expected
      • Japan- slow and steady growth
    • Middle East & Africa:  RevPAR growth at the mid-point of their range
    • Latin America
      • Mexico:  improving- expect it to be the engine of Latin America growth for them in 2013
      • Argentina:  inflation is ~25% and impacting their markets. Likely to get worse until they devalue
      • Brazil:  slowed as China slowed but is now recovering
  • Owned hotel portfolio: only represent 5% of their total rooms. Performance is increasingly driven by market specific events and renovation distruptions.
    • St Regis NY, Westin Maui, Sheraton Rio, and the Sheraton Park Lane in London
    • Also impacted by asset sales - $25MM based on what was sold in 2012
    • Situation in Canada improving should improve results in NA results in their owned portfolio
  • $200MM of cash delivered by SVO in 2012. They are adding selectively to inventory in Florida and have inventory in Mexico.  Will continue to manage this business for cash in 2013.
  • Potentially another $10MM of restructuring costs will be in 1Q13 and is incorporated in their SG&A guidance
  • Expect to grow rooms by more than 4% in 2013
  • They are raising prices at Bal Harbour and getting over 1300/SQFT on recent sales. Unlike last year, do not expect them to significantly exceed their guidance since they have limited inventory to sell. Will try to complete sales by year end
  • Expect capital spend in their owned hotels to peak this year and decline going forward,especially as they continue to sell more hotels.  
  • They will not pay down more debt in 2013
  • They will only make a very compelling acquisition ala Le Meridian. Otherwise all cash will go back to shareholders



  • Starting to see an uptick in China as soon as the transition was announced.  Also expected that it will take a few months to ripple through. Most announcements occur in March and things should get better from there. This 1Q is going to be the trickiest quarter of the year for the country - so the January trend of +6% is very encouraging.
  • Their NA RevPAR came in below the industry RevPAR: part of that is due to their geographic mix (Pheonix, NY, Canada) vs. industry average. Continue to be encouraged by corporate rate negotiations, group bookings, etc
  • M&A environment: Believe that they are entering a window of opportunity. There is more liquidity and ability to get financing. Significant amount of money from ME&A and Latin America. Plan on being very active in the market. Goal is to move as soon as they can to execute their asset sale program. However, given the number of hotels they have to sell and size of their hotels, they do expect sales to be lumpy.
  • Quarterly dividend vs. annual? Something that they will consider and talk to their Board about. You should not think of their annual dividend as special.
  • They are past the point from where they have rates on the books that are artificially low from when the economy was in a worse place.  Given the supply/demand imbalance for the next few years, they still expect that RevPAR growth should remain strong for the next few years.
  • Their approach over the last few years has been a rifle shot approach to selling assets. They still have seen a frothy market for portfolio sales.  So they are still targeting individual asset sales. There are no sacred cows in their portfolio. Everything is for sale.
  • With the exception of some financial institutions, they are getting good feedback on travel for 2013 vs. 2012. 
  • Corporate negotiated rate expectations are a little lower from where they expected to be mid-last year.  
  • Did see a bit of a downtick in some parts of Europe recently, but the 1Q is not particularly indicative of the year.  They also had a lot of hotels under renovation that are back online now and that should help them.
  • Companies have been very cautious about adding back costs.  Group business coming in a slow and steady way.  However, they feel like that is good because it makes the trend more sustainable.
  • Group business is a smaller % of business outside the US. Hence as they become more international, that business becomes less important for them.
  • Transient business is easy to turn on and off based on opportunities. 
  • REIT spinoff?  That would be one way of more quickly realizing the value of their portfolio. However, there is a spinoff discount and extra overhead that comes with 2 companies so they think that they can recognize better prices on individual sales.  However, never say never.
  • Have been good at getting multiples in excess of their current multiple on their sales. Have been balanced on what they are selling - some great hotels and some so so hotels. Despite all the sales, their EBITDA on owned will still be higher so the value of that portfolio should also be higher



  • HOT reported $0.70 of EPS from continuing operations and $325MM of Adjusted EBITDA, which included $32MM of Bal Harbour EBITDA
  • WW System-wide RevPAR: +4.1% in constant $ (3.6% in actual dollars)
    • NA SS RevPAR: +5.2% in constant $ (5.4% in actual)
  • During the quarter, the Company signed 40 hotel management and franchise contracts,
    representing approximately 8,400 rooms, and opened 17 hotels and resorts with ~ 3,900 rooms. During the quarter, 11 properties (representing ~2,600 rooms) were removed from the system.
  • During the quarter, the Company completed sales of hotels for gross cash proceeds of
    approximately $275 million, retired $725 million of debt, issued $350 million of 3.125% Senior
    Notes due 2023, paid an annual dividend of $1.25 per share, and repurchased 3.5 million shares at
    a total cost of $180 million and an average price of $52.07 per share.
  • Going forward, we will deploy capital by reinvesting in our business and by returning cash to
    shareholders through dividends and stock repurchases
  • We are poised to benefit from higher rates in North America and Europe where demand is growing but supply is already short. Even more important, the dramatic economic growth in Asia, Latin America, Middle East and Africa is fueling demand for our brands worldwide.
  • Originated contract sales of vacation ownership intervals and numbers of contracts signed decreased 2.3% and 0.8%, respectively, primarily due to lower tour flow and average price partially offset by a slight increase in closing efficiency. The average price per vacation ownership unit sold decreased 1.1% to approximately $14,400, driven by inventory mix.
  • Bal Harbour revenues were $99MM in 4Q.  HOT closed on 27 units and realized cash proceeds of $96MM.  Through December 31, 73% of available units were closed on and revenues recognized were $810MM and EBITDA of $160MM.
  • SG&A increased 5% YoY, primarily due to severance costs of $9.0 million. The Company has recently completed certain changes to its organization structures in its Europe, Africa, and Middle East division and its Americas division. Some of those changes were made in the fourth quarter of 2012 and the Company recorded approximately $9.0 million in severance costs which is included in selling, general and administrative costs for the fourth quarter of 2012. Other changes will take place in the first quarter of 2013 and the Company expects to record severance costs of approximately $10.0 million in selling, general and administrative costs in the first quarter of 2013.
  • Capex: $58MM of maintenance and $73MM of development capex
  • On October 24, 2012, the Company completed a securitization involving the issuance of $166 million of
    fixed rate notes. Starwood is contributing approximately $174 million in timeshare mortgages resulting in
    an advance rate of 95% with an effective note yield of 2.02%. The proceeds from the transaction were
    used for general corporate purposes and will pay down the securitized vacation ownership debt related to
    its 2005 securitization in 2013
  • The Company’s Board of Directors increased its annual dividend by 150% to $1.25 per share. The
    dividend was paid by the Company on December 28, 2012 to holders of record on December 14, 2012.
  • As of December 31, 2012, approximately $180 million remained available under the Company’s share
    repurchase authorization


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






OVERALL:  The quarter came in a little weaker in the core business than expected. However, we are impressed by the exceptionally strong balance sheet and what that can mean in terms of returning cash to shareholders over the next few years.



  • IN-LINE:  China REVPAR decelerated in Q4 as consumers were waiting to see if economy would recover. Chinese economy did pick up as soon as the leadership transitioned.  January REVPAR is trending +6%. 
    • "With a leadership change now slated for November 8, we do not expect any improvement in China for the rest of the year. In fact, the trend may get worse before it gets better. Our team on the ground is convinced that China will get back to business after the transition but probably not till early next year. We expect Asia REVPAR growth to be in the middle of our guidance range or lower...  we are optimistic at this point that growth in Asia will pick up as we enter the new year."


  • SLIGHTLY WORSE:  REVPAR only grew 1% in 4Q.  Demand environment continues to be weak. Management does not see much change in 2013.  Given the many challenges in Europe, HOT forecasts REVPAR growth at or below the low-end of +5-7% range.
    • "Europe REVPAR growth will be at the low end of our guidance range."


  • WORSE:  4Q NA revpar came in at 5.2% (low end of guidance and below STR UUP 4Q average of 6.8%), reflecting concern over the election and fiscal cliff.  January REVPAR is up 7%.  HOT sees 6-7% REVPAR growth in 2013.
  • PREVIOUSLY:  "Corporate America is cautious ahead of the elections and fiscal cliff discussions, so it's unlikely that we'll see any up tick in the fourth quarter. On the positive front, Canada is improving sequentially and will have REVPAR growth in Q4."


  • IN-LINE:  HOT sees encouraging signs in Africa.  ME results was led by the gulf area markets; Egypt remains unstable.  HOT expect these trends to continue in 2013.
  • PREVIOUSLY:  "In Africa and the Middle East, Saudi and the Gulf states continue to do well. Across the rest of the Middle East our business reflects what you read in the papers. Things are not improving in Egypt. Except for Algeria, the rest of North Africa remains unstable. Sub-Saharan Africa is doing well with Nigeria and South Africa leading the way. Easy comparisons helped report our results in this region in Q3, comparisons and are more normal as we enter Q4 and we expect REVPAR growth in the middle of our range."


  • BETTER:  Bal Harbour contributed $32 million of EBITDA in Q4.  For 2013,  HOT expects Bal Harbour contribution to total $50 million, higher than previous guidance of $30-40 million.
  • PREVIOUSLY:  "We expect to deliver another $10 million in EBITDA in Q4, bringing the full year total to $135 million.  By year end, we expect to have closed over 70% of the residential units available for sale. Demand for units remain strong and we continue to raise prices. We are on track to achieve our goal of $1 billion from condo sales revenue at sellout."


  • WORSE:  Group and corporate rates are tracking in the mid-single digits in 2013. 
  • PREVIOUSLY:  "We remain of the view that corporate rate negotiations should result at least in the high single-digit increase for 2013. We will describe the group business as steady, but not robust. The large group segment is an area of weakness. We expect that North America REVPAR growth in Q4 will be in the upper half of our 4% to 6% guidance range."


  • IN-LINE:  Capital spend on owned hotels will peak this year and decline as they complete renovations.
  • PREVIOUSLY:  "I think you should assume that next year, we'll be at or slightly above this year was because of some of those things being pushed into next year. And then after that, we should start to see it moderating."


Takeaway: We remain the bears on the Argentine peso and continue to see heightened risk of yet another Argentine sovereign debt default.

  • Argentina faces threat of expulsion from the IMF: The Argentine peso, which is down -20.6% since we outlined our bearish bias back on 11/4/10, continues to get Cristina Fernandez’d. If Argentina does become the first country permanently expelled from the IMF as indicated by the recent censure, we would expect to see Argentine sovereign debt default risk accelerate with the loss of at least $3.2B in emergency aid. This is something already being priced into CDS markets: the 5Y tenor is up +933bps/+66.4% MoM to 2,338bps wide.
  • Because of phony inflation statistics (USA?): What would turn the aforementioned censure into a full-fledged expulsion is a failure to appropriately address INDEC’s official CPI calculation, which has been under intense scrutiny for consistently underreporting inflation since 2007. For example, 2012’s “official” +10% YoY CPI reading compares with the estimates of leading private sector economists – many of whom having absorbed substantial fines – in the area code of +26% YoY.
  • Argentine gov’t vs. the market: This serial underreporting of inflation has cost holders of the country’s inflation-linked bonds ~$6.8B over the past 5yrs. On a 2yr basis, Argentine inflation-linked notes are down -31% vs. a +25% gain for Brazilian linkers and a +27% gain for Mexican linkers. There exists an opportunity for material upside in these illiquid securities if Argentina gets its act together under intense international pressure, but betting on a sane response from Cristina Fernandez is like betting on a Chicago Cubs World Series pennant – possible, but don’t hold your breath!
  • Another sovereign debt default on the horizon?: Absent a complete reversal of Argentine fiscal and monetary policy, continue to see heightened risk of yet another Argentine sovereign debt default over the long-term TAIL. Key catalysts on that front include: 1) The 2/27 US court ruling that will determine if Argentina must pay $1.3B to holdouts from its 2005 and 2010 restructurings; and 2) Continued popping of Bubble #3 (i.e. commodities, which should continue to make lower-highs as an asset class over the TREND and TAIL durations). The CRB Index remains bearish TAIL from a quantitative perspective.
  • Commodity deflation is a key catalyst: Regarding point #2 above, it’s important to note that investors in commodities hedge funds redeemed over 20% of their capital last year following the worst annual industry performance in over a decade (-3.7% in 2012 vs. -1.4% in 2011). We expect to see continued pressure on commodities as an asset class over the long term as investors who have failed to heed our warnings should continue to carry on varying degrees of forced sales amid redemptions. As we highlighted in our APR ’12 note titled, “ARGENTINA, IMPLODING”, what’s bad for commodities is really is really bad for the Argentine economy and its fiscal health.
  • Unsound fiscal policy ramps risk: Specifically, the central government has been relying on international reserves to service international debt since 2010 ($20B to-date and another planned $8B in 2013 as the gov’t ramps up spending ahead of OCT’s mid-term elections). With the EM universe’s highest interest rates of ~13%, this payment strategy has left Argentina with int’l reserves of only $42.6B, down -19% from a JAN ’11 high of $52.6B. USD-denominated deposits at Argentine banks have fallen to a 4yr low of $7.7B – down roughly 50% since Fernandez’s reelection in OCT ’11.
  • The Fernandez administration fears capital flight: To stem the tide of capital flight and preserve these now-sacred reserves, the Fernandez regime has nationalized corporate and pension fund entities (see: YPF saga), as well as implemented a series of incredibly punitive capital controls with some even resulting in imprisonment as a punishment for violation.
  • ...Which continues unabated: Argentinians – who ultimately fear a mass “pesofication” of their USD deposits and cash flow streams at the official USD/ARS exchange rate – continue to find clever ways to help their hard-earned capital escape the clutches of Fernandez & Co. The unofficial “blue-chip” swap rate (i.e. obtaining and selling USD-denominated securities for access to USD) has dropped -39% YoY to 7.6948 per USD; that decline compares to a far more modest -13.1% YoY depreciation of the official exchange rate.
  • Don’t fight the tape: It’s also worth noting that 3M NDF contracts are pricing in an additional -6.7% of declines and the 1Y contracts are pricing in an additional -26.6% of further downside from the latest spot price.
  • What to do from here?: Stay long the dollar-peso rate (i.e. short the ARS). For as long as Cristina Fernandez is running the show in Argentina, this should remain a high-conviction investment thesis.












Darius Dale

Senior Analyst

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