Revisions Rule The Day


Another week passes where revisions are trending better, and the group is following suit. The major call-out, however, is that we're now sitting at peak valuations based on NTM consensus EPS estimates (17x).


The major question here for me is whether or not estimates are real. Has the sell-side finally overshot on the downside and what appears to be 17x earnings is actually something in the low teens?


In aggregate, I think that estimates are largely too low for the next 12-months, as our team has outlined since March 5th (We're Getting Fundamentally Bullish). But back then, it did not matter which names you played, as pretty much the whole group went up in unison.


The sector call still matters (check out Howard Penney's sector strategy work), but now, company-specific revisions matter a lot more than they did a month ago. If you're involved in a name and think that 'a miss is already in the stock,' then I feel for you come earnings day.  There are lesser quality names that have set themselves up to smoke estimates in the upcoming quarters - such as CRI, JNY and SKX. Expectations are now lofty and I'm not convinced the upside is coming in a healthy way (setting up for shorts as '10 nears). Then there are others like UA, RL, HIBB, and HBI where I think the upside is meaningful AND warranted. PSS is another, with my lingering concern being the upcoming quarter. It won't be squeaky clean - which probably matters after double in the share price. I think that 2H estimates need to go up by almost half, so I'd keep that name front and center.


Revisions Rule The Day - 90 day revisions chart


Revisions Rule The Day - NTM and Consensus Chart

UA: Bottom Up Shoe Math


Having doubled off its lows and trading at 11x EBITDA, UA is admittedly not cheap. But the top line growth is there - esp in shoes as outlined herein. Margin oppty is being realized, and capital intensity is coming down. Don't underestimate this one.


I'm still amazed by Wall Street's myopic nature associated with Under Armour's presence and opportunity with its new footwear initiative. People hear management's comments on the conference calls and conferences and get so hyper-focused around a few hundred thousand pair here or there. Let's put some numbers into perspective.


If we take the running category alone, and assume a rate of daily sell through averages at less than one pair of shoes per day at a conservative list of major retailers, then it gets us to $65mm in annual sales along at a $40 wholesale price point.  This suggests about 8-9% market share for UA in the running category at these retailers. Could I argue 2 pair per day on overage over the course of a 12-month time period? Yes, not unreasonable by any means.


This does not include basketball, outdoor, or any form of casual footwear whatsoever. You could take that $65mm number, and multiply it several times over into new categories. Therein lies my assertion that it is not tough at all to get to $300mm in footwear revenue in 2-3 years (40% growth over today's sales base).  Furthermore, this would put UA at half the market share run-rate of the likes of Adidas, New Balance, and Asics. Ironically, it puts it right in line with Reebok (which is a mess).


If I'm going to place my bet on which brand will pierce the 10% share barrier next, it's going to be UA.


UA: Bottom Up Shoe Math - ua

US Market Performance: Week Ended 5/1/09


Index Performance:


Week Ended 5/1/09: DJ +1.7%, SP500 +1.3%, Nasdaq +1.5%, Russell2000 +1.7%

Q209 To-Date: DJ +7.9%, SP500 +10.0%, Nasdaq +12.5%, Russell2000 +15.2%

2009 Year-To-Date: DJ (6.4%), SP500 (2.9%), Nasdaq +9.0%, Russell2000 (2.5%)


Keith R. McCullough

Chief Executive Officer

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HOT management's commentary is in quotes and our responses are bulleted.




"RevPAR declines in the quarter were increasingly driven by declining rates while occupancy appears to have found a plateau"

  • Price changes are very sticky so ADR isn't going up anytime soon. That is why the hoteliers resisted for so long. Now, they are falling off a cliff.


"Our guidance does not include any impact from the recent concerns about swine flu. It is very hard to estimate impact."

  • Providing themselves an out in case business doesn't stabilize?


"Also, the year-over-year comparison is very unfavorable for FX in the first three quarters, but with the dollar at current levels the negative FX impact disappears in Q4 this year.  In short, our second half RevPAR numbers benefit from easier comparisons to last year and the disappearance of the FX hit in Q4."

  • We already take this into account hence the less bad ½ 2009 RevPAR. However, costs won't be falling as much either.


"Last year in Q1, our RevPAR growth for company-operated hotels was a positive 8%. This year it was negative 24%.  So on a two year basis, we were down 16%.   FX hurt us to the tune of almost 500 basis points in the first quarter.  So the two-year run rate on a constant dollar basis was down around 11%."

  • They didn't back out the FX from last year as well. North American RevPAR had the benefit of the Canadian dollar being up 17% in 1Q08


"Last year our RevPAR at company-operated hotels was down 12%. With the dollar where it is today, there is only a 200 basis point FX impact. So a two-year run rate on a constant dollar basis of 11% in Q4 this year, i.e. an assumption that things on a two-year basis stay about as bad as they are right now, would imply relatively flat RevPAR in Q4.  We're not suggesting that that is what we are expecting.  In fact, as you can see from our baseline adjustments, we're assuming RevPAR stays materially negative in Q4 which would imply a worsening two-year run rate into Q4."


  • Sorry but we just don't see RevPAR moderating to being flat year over year in the 4Q09. You can "You Tube" us on that one. We have consistently said that we need to see occupancy declines stabilize and improve before we see a real recovery. With occupancies in the 50's industry wide, there is no pricing power since the hotels are trying to fill rooms with low rated discount business to simply cover fixed costs. Therefore, we are sticking with our thesis that ADR will continue to be weak until we get occupancy recovering - and we are seeing no signs of that occurring.





"We're being more active than ever with key travel participants including, for example, double savings with AAA and a 4% credit to the master account for meeting planners. We're also working closely with online travel agencies to drive business through limited time offerings."


"While this is another steep decline, the second quarter would be the first time in six quarters that our RevPAR trend is not expected to worsen. The second derivative is, at worst, becoming less negative."

"We're working on innovative offerings to drive business to our hotels, such as SPG flights which extends our 10-year old, no black-out offer to the airline space. Members can use points to book an airline ticket with the same convenience of a hotel room."


"For every two stays, our members will be rewarded with one free weekend night."

  • This basically amount to a 30% ADR cut





"Our managed and franchised revenues dropped 15.4% in the quarter as our footprint growth offset declining RevPAR.  We're earning new fees from the nearly 200 hotels that we opened between 2006 and 2008."

  • Clearly they are not commenting on incentive fees or fees earned on Bliss & other businesses - those were both down a lot more than 15% as totalfee income fell 21%
  • Incentive fees dropped 32% and fees from Bliss & Miscellaneous dropped 24%.... amortization of gains though stayed pretty constant at $20MM (from $21MM a year ago)





"Close rates and tour flows were in line with our expectations, and for the first time in several quarters we actually saw some trends improve.  Price realization was slightly lower than expected but this was entirely a result of product mix, not price reduction."


"...delinquencies are running at 4.4% versus 2.9% a year ago."


"Also not included in our guidance is any loss we might incur from a securitization. We expect the loss to be small."

  • Of course let's not count the loss but give them credit for the interest income





"We're still on track to achieve overhead savings of over $100 million"


"We also cut our company-wide capital spend by roughly 60% from 2008. Meanwhile we continue to evaluate options for Bal Harbor where we've already significantly reduced costs and slowed our capital spend."


"We expect to offset some of this additional decline by doing better on hotel level costs by $20 million and another $20 million more in SG&A cost reductions. Interest expense will be higher, depreciation and amortization will be lower, as will our tax rate for the year."


" sense is that the majority, something like ¾, I think, are sustainable long-term, maybe more than that."

  • This is fodder for another, more detailed post. We don't believe they will sustain 75% of the cost cuts. Coming out of the lodging downturn of 2001-2003, flow through on the huge RevPAR gains of 2004-2007 was extremely disappointing





"With a high probably of at least one receivable sale, we now expect the gross debt will drop below $3.5 billion and even lower when we execute some of the other initiatives that are currently in the works."

  • We do like the job management has done with the balance sheet. The timing on Friday's $500 million debt offering looks very advantageous to HOT with a yield of only 8.875%. HOT already cured its covenant issue with the recent amendment to its credit facility and now has the liquidity to fund next year's maturity.

More Than A Great Bikini Team: Sweden On the Long Side

"Life only demands from you the strength that you possess. Only one feat is possible; not to run away."
-Dag Hammarskjold, Former Secretary General of the United Nations


Current Position: Long Sweden via EWD


Dag Hammarskjold was called by JFK "the greatest statesman of our century".  This giant of a man is as emblematic of the Swedes as their picturesque fjords and championship winning national hockey teams are.  As it relates to global stock market performance in 2009 year-to-date, Hammarskjold's quote is an accurate one.  Currently, Sweden is one of the leaders in the global stock market performance race with its benchmark OMX Stockholm 30 Index up 17% MTD and 15.3% YTD. 


Yesterday, we sold our long position in Germany, via the etf iShares EWG, for an 11% gain and turned around and bought Sweden, via the etf iShares EWD, with the etf down on the day. We like Sweden as a pair against our short position in Switzerland (EWL), which has a dysfunctional financial system.


Alongside Germany, Sweden is one of a few countries that we feel pseudo comfortable with from a fundamental standpoint in Europe.  Most of Europe has been battered by rising unemployment and budget deficits while output, exports, and consumer demand have crumbled.  Strong deflationary pressure has become the norm across the region.  Sweden's most recent CPI figure for March decreased to 0.2% Y/Y, the lowest rate in four years, which helped prompt the Swedish Central Bank (Riksbank) to reduce the interest (repo) rate 50bps to 0.5% on 4/21. 


While the Swedish Central Bank has limited room to cut, the country has the balance sheet and tax levers to further stimulate.  In addition, since it is not a member of the European Monetary Union (does not use the Euro), Sweden has the ability to be much more targeted with its stimulus package, worth $1 Billion or 3% of GDP.


Given its large public sector, with estimated tax revenue at ~47% of GDP, Sweden has inherent stabilizers that have and will allow it to offset the decline in private sector spending and activity that we have seen globally over the last 9 months. From an economic perspective, Sweden has limited exposure to commodity based industries.  Specifically, only 2% of GDP is related to agriculture.   The Swedes have a highly skilled and educated work force.  Almost 50% of output and exports are accounted for by the engineering sector, which will be better shielded in a downturn.

We're bullish on the country's high net fiscal stimulus as a percent of GDP and surgical maneuvering to cut interest rates since Q4 '08 to blunt contraction and spur lending. Sweden's sovereign debt still holds a AAA credit rating from Fitch Ratings, despite tail risk surrounding Swedish banks, many of which were primary lenders to the Baltic states, countries that are now in the deepest recession within Europe.


We believe that strong exporting countries like Sweden and Germany likely stand to benefit more than their European peers from a global economic revival and we will trade Sweden opportunistically versus shorting more structurally challenged countries like the United Kingdom and Switzerland.


Daryl G. Jones
Managing Director

Matthew Hedrick


More Than A Great Bikini Team: Sweden On the Long Side - swed

Squeezy's Shark Jumping: SP500 Levels, Refreshed...

If you're bullish, from a price (841-860 in the shaded green waters of the chart below), you have to be loving the Shark Jumping that's going on out there again today.


Squeezy's Shark Jumping: SP500 Levels, Refreshed...  - fon


Per Wikipedia, this is a picture of Fonzie as he "jumps over a shark while on water-skis. After seeing this, viewers considered that the show was getting really desperate for ideas and just lost its strength."


Make you think of all those super duper "smart" analysts who are short everything from UA to SBUX? At a point, they become desperate... and just have to cover.


We'll keep selling into their capitulation covers at Squeezy's red dotted line (883 in the SP500). Higher lows and higher highs remain as bullish as Fonzie's black leather.


Keith R. McCullough
Chief Executive Officer


Squeezy's Shark Jumping: SP500 Levels, Refreshed...  - fon2

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