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HSY Continues Its Indulgent Run

HSY reported Q1 earnings this morning. The company is largely on track, growing in all categories across multiple channels, including club, and has good marketing support behind the launch of Brookside (dark chocolate, wellness). Q2 will be challenged based on tougher comps in a historically weaker quarter. Volume should drive performance in the year in which HSY expects a 12% gain in EPS. We like the story, but would prefer a better entry point - perhaps Q2 concerns and performance provide it.   


What we liked:

  • Revenue slightly missed consensus $1.83B vs $1.84B, but up a healthy 5.5% (Volume +5.3%; Price +0.5%; FX -0.3%)
  • EPS of $1.09 beat estimates of $1.04, up 13%, and FY guidance adjusted up to $3.61-$3.65 vs previous $3.56-$3.63 - first quarter guidance increases are rare
  • Gained market share in every category that it competes in
  • Higher dollar sell-through for Easter despite shorter season
  • GM +240bps in the quarter on lower commodity costs of $35MM and supply chain efficiencies
  • Strong brand support for Brookside
  • Focused on continued expansion to emerging markets (China, Brazil, India, and Eastern Europe)

What we didn’t like:

  • Q2 is historically a weaker quarter and is facing higher tax rate and more difficult comps
  • Valuation, though more easily supported in the case of HSY given its growth profile and categories than for the balance of the staples group

Call with questions, 




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Can The VIX Be Fixed?

The CBOE Volatility Index (VIX) has taken a beating as the S&P 500 and US stocks continue their bull run. Over the last five trading days alone, the index has fallen -19.3%. If you recall our trading strategy, when the VIX is oversold and the S&P 500 is overbought, it's a time when we'll consider selling the S&P. Right now, the key levels we're looking for are 1603 in the S&P 500 and 10.8 in the VIX. 


Can The VIX Be Fixed? - CBOEVIX today


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: Given the many scares in the industry recently, the earnings beat, unchanged guidance and some reassuring comments on the conference call were a net positive.  

RCL 1Q13 REPORT CARD - rcl2 



  • SLIGHTLY BETTER:  More optimistic but still see limited visibility.  Germany is doing well, offset by weakness in Spain and UK.  RCL believes for this segment, it is sufficiently ahead on rate and occupancy for FY 2013.  Around February, they were less than 50% booked for 2013, now they are 70% booked.  No changes in 2014 itineraries that have been announced. 
    • "Even though the economies in the U.S. and in places like Germany and France still aren't very good or aren't great, it's really the weakness in Southern Europe that is keeping our yields from truly exciting growth.  Europe represents 27% of 2013 capacity, down 3.2 points versus 2012 against the backdrop of the Arab spring in 2011 and both industry and macroeconomic adversity in 2012, we expect the yield increase in 2013 relative to both years. Northern European capacity for the industry and the company are substantially up and our year-over-year yield expectations are lower in the North than they are for the Eastern and Western Med, where our capacity is down in each sector for the second consecutive year....In aggregate, we're feeling is though we will have yield improvement in Europe this year."
    • "And while the way the season is off to a promising start in most markets, we've seen a significant deterioration in demand from Spain. All indications suggest the continued challenging operating environment in Spain for an extended period of time. This has resulted in significant changes in our plans and expectations for the brand."
    • "The UK has been disappointing from a volume standpoint, but pricing is above last year."


  • WORSE:  Represent 5% of 2013 capacity.  Gave lower yield guidance given the removal of Japanese ports of call from nearly all of their 2013 North Asia program.  As a result, most itineraries from their Shanghai/Tianjin homeports are calling only South Korea ports. Australia yields are forecasted to be flat to slightly lower YoY.
  • PREVIOUSLY: "It's particularly interesting to note how well both Australia and China have held up. Both are looking towards flat to higher yields despite really very large capacity increases and in the case of China, that's in spite of the impact from the territorial dispute with Japan. Asia-Pacific... Our booked load factors look strong for sailings in the first half of the year, although pricing is behind a year ago. Overall, we expect yields to be about flat for this region despite the large capacity increases."


  • LITTLE WORSE:  Still expecting record yields in 2013 but saw weakening demand for Caribbean itineraries following bad publicity in March which is now rebounding.
  • PREVIOUSLY: "At the itinerary level, the Caribbean will account for 44% of our 2013 capacity, which is a 4% increase from last year. We are seeing solid booking trends for this product group, and based on what we know today, we expect a record year for yields in the Caribbean." 


  • BETTER:  Booked load factors and APDs are higher YoY.  Bookings curve has been expanded across the board (similar to 2008).
    • "As of today, our total booked load factors and booked APDs are slightly better than at the same time last year and better than this point in time in 2011."
    • U.S. source business is up significantly versus the same period last year. Asian and Australia bookings have more than kept pace with the added capacity we have placed in both markets. With the exception of the UK and Spain, Europe has been pretty solid."
    • "I think the U.S. is for the most part... in line with the year ago. We do have some pockets, some products where people are actually beginning to book a little bit further out, which is obviously helpful. Northern Europe for the most part is very consistent with what we were seeing last year. But we have seen contraction in Southern Europe. The Southern European countries are actually booking about a month closer to sailing than they had been a year ago."


  • BETTER:  Saw improvements in all categories and on all ships in 1Q.
  • PREVIOUSLY: "As it relates to onboard revenue, there's a tremendous effort taking place across all brands to create onboard revenue upside, and I would say we're cautiously optimistic at this point in the year."

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Strong quarter, unchanged guidance and some reassuring comments are boosting the stock today. Should we be optimistic about the market of just market share gains from CCL?


"It was a gratifying first quarter...Ticket revenues were better than expected, costs were well controlled and it was encouraging to see record guest satisfaction and noticeable improvements in onboard spending as a result of our revitalization efforts"


Richard D. Fain, chairman and chief executive officer




  • Expect that Quantum of the Seas will generate compelling returns for the company
  • Expect to invest their savings on marketing throughout the rest of the year
  • Think that some of the slowdown in Caribbean booking in March was due to the negative publicity about the industry but see some of that easing and still expect strong yields this year
  • They are seeing positive developments with the booking window widening about 2 weeks from 2011 and 2012.  Prices, on average, are running 3% ahead of next year.
  • As-reported yield guidance lowered by 100bps due to stronger $
  • Favorable fuel prices and lower consumption are offsetting the negative effects of the stronger U.S. dollar.
  • They have put on some more fuel hedges recently
  • Sense that their current distribution of inventory across regions is a good one
  • Australia rapid capacity growth has depressed yields but the market remains healthy



  • How much of the strength that they are seeing are coming from share gains from CCL?
    • No comment
  • Looks like the main markets in Europe are booking at a pace that has somehow derisked their outlook for the balance of the season.
  • Before the bad press, they were doing better (in the Caribbean).  They are back in "equilibrium" now but not running as strong.
  • They have not seen a mix shift between first time cruisers and repeat cruisers from the recent publicity.  However, bad publicity does usually impact first time cruisers more than repeat cruisers.
  • Had about 8 cents of favorability of costs in the quarter mostly due to marketing timing.  They do expect to reinvest that money throughout the year- some of which will be spent in 2Q.  They did save 2 cents from FX which should drop to the bottom line.
  • When they gave their guidance in Feb, they factored in easier comps in Europe. That's why they expect to have positive comps in Europe this summer. They are around 70% booked for Europe for the year. Back in Feb they were only 50% booked.  
  • They have reviewed their systems in light of the recent events and feel like their current capex plan properly covers the maintenance of their ships 
  • Europe as a whole is doing better than they expected. Spain followed by the UK are the 2 weakest markets. Germany has held up better than expected, especially with the TUI brand
  • Booking window:  Across their portfolio, they have seen an across the board expansion of the booking curve by 2 weeks or so. Most of the ships that have had renovations have done the best.
  • Australia market has been an exceptionally strong market during the past few years.  As a result, they have had a lot of capacity additions to that market.  They have lowered their yield expectations for that market.
  • Why are they lowering deployment for Europe if things are picking up?  It's not that the market is "strong"; it's that their initial expectations were too low.
  • Within Europe, there is more business coming from Northern Europe than Southern Europe
  • Carnival is saying that Europe is getting a little bit worse.. .RCL is saying its getting better?  Their view on Europe is really "on the margin" it is slightly better than what they saw in Feb.  They are happy that they took 10% capacity out of Europe and are still contemplating taking out 10% more capacity out of Europe in 2014 in hopes of getting better yields. (already in new press release)



  • Overall, demand trends appear consistent with the company's earlier expectations.  Constant-Currency Net Yield and EPS guidance for the year remain unchanged at this time.   
  • Both onboard revenue and ticket pricing improved...  NCC excluding fuel were also better than anticipated, primarily due to timing
  • Since the beginning of the year booking volumes have averaged 5% ahead of the prior year.   At this time, full year booked load factors and APDs are higher than the same time last year.  The overall demand environment is in-line with the company's expectations from February, but as usual there are regional fluctuations.  
    • Bookings from North America have remained strong since the beginning of the year, with the exception of a modest disruption to Caribbean demand which the company attributes to adverse industry media coverage. 
    • Demand from European sourced guests strengthened in early February and the company expects pricing improvement from the region for the year.  
    • Demand from China has weakened somewhat due to itinerary changes related to the territorial dispute with Japan.
  • RCL expects that the negative effects from the adverse industry media coverage in March and itinerary changes in Asia will be offset by the favorable performance in the first quarter and a slightly better outlook for Europe.  As a result, full year 2013 Constant-Currency yield expectations remain unchanged from the company's February guidance of an increase of 2% to 4%. 
  • RCL recently opened the majority of its 2014 deployment offerings and announced a two-month European summer micro-season for the Oasis of the Seas that complements the vessel's scheduled maintenance drydock in Rotterdam.  Demand for these sailings has been exceptionally strong. 
  • RCL expects to further reduce its European deployment year-over-year by another 10% and also expects that European itineraries will be approximately 25% of its overall 2014 capacity. 
  • As of March 31, 2013, liquidity was $­­­2.2 billion.
    • Scheduled debt maturities for 2013, 2014, 2015 and 2016 are $1.5 billion, $1.5 billion, $1.1 billion and $1.0 billion, respectively.  
  • The company will continue to opportunistically approach the prepayment and refinancing of its 2013 and 2014 scheduled maturities.     
  • Projected capital expenditures for 2013, 2014, 2015 and 2016 are $700 million, $1.2 billion, $1.2 billion and $1.3 billion, respectively. 
  • Capacity increases for 2013, 2014, 2015 and 2016 are 1.3%, 1.0%, 6.9% and 4.8%, respectively.  The company's annualized capacity growth rate from 2012 to 2016 remains at a historically low rate of 3.5%



Takeaway: Cards remain a safe spot on the long side for now. Claims, and by extension credit trends, show no sign of turning at the moment.

This note was originally published April 25, 2013 at 09:23 in Financials

Long in the Tooth, but OK for Now ...

Both seasonally adjusted and non-seasonally adjusted initial claims posted sharp improvement in the latest week. In the past we've shown how initial claims are the best leading indicator for forward delinquency metrics at credit card lenders, on a 13-week lead/lag. Clearly, card results were better than expected in the first quarter of 2013 and the claims data we're seeing currently suggests further progress in second quarter from Discover Financial Services (DFS) and Capital One (COF), and American Express (AXP) to a lesser extent.


We've argued in the past that renormalized delinquency levels, i.e. reaching DQ levels consistent with 2005/2006 averages, would herald an end to reserve release tailwinds, and, by extension, usher in earnings growth headwinds. This ongoing positive trend in claims, however, coupled with Krugman's "Jobless Trap" - the segment of the population now perpetually long-term unemployed - has enabled a continued fall in DQ rates since this former core subprime cohort is now "non-underwriteable".


This curious confluence of positive selection (vs. adverse), fast turning assets and secular credit tailwinds has pushed operators to take down coverage further than we would have thought prudent or possible. While this sets the stage for ongoing improvement in the short/intermediate term, we continue to fret about the long-term implications of making all-time lower low DQ rates in a low-growth, highly competitive asset class. Auto is perhaps an even more glaring example, as we noticed in the weekend paper a local credit union offering 0.99% on terms up to 48 months. How that will even cover normalized credit losses in this newly emerging environment of falling used car collateral values I have no idea. But for now, everything's good. 


The Numbers

Prior to revision, initial jobless claims fell 13k to 339k from 352k week-over-week, as the prior week's number was revised up by 3k to 355k.


The headline (unrevised) number shows claims were lower by 16k week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.5k week-over-week to 358k.


The 4-week rolling average of non-seasonally adjusted claims, which we consider a more accurate representation of the underlying labor market trend, was -6.3% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -3.8%





























Ground And Pound

The British Pound rallied today after reports from the U.K. Office for National Statistics showed the economy expanded by 0.3% in the first quarter, exceeding expectations of a 0.1%. Against the Euro, the Pound gained considerably, which is outlined in the GBP/EUR currency cross chart below. While the growth isn't spectacular, it's a heck of a lot better than the situation in Spain and elsewhere across Europe.


Ground And Pound - GBPEURCROSS