This note was originally published April 26, 2013 at 10:39 in Restaurants

Starbucks (SBUX) is the best-run company that we follow and the long-term TAIL seems unlimited. The company’s geographical reach and size is highly impressive. Even more impressive is the performance of the Americas business, given its size and maturity.


We maintain a positive view of Starbucks as an effective way to play improving US consumption.  While sell-side analysts this morning are correct that the global macro outlook is challenging, it is important to know where SBUX has its exposure.  The U.S. is what will drive beats and misses in the near term, despite much unit growth being focused in China/Asia-Pacific. ~88% of company stores and ~85% of licensed stores within the "Americas" division are located in the United States.


SBUX: STILL TOP DOG - yum mcd sbux opinc



The Good


Last night, Starbucks reported global same-store sales growth of 6% (13th consecutive quarter above 5%).  Same-stores sales in the Americas division grew 6% (including 5% traffic). Total revenue growth of 11% produced a 1.8% increase in operating margin and a 20% increase in earnings per share (EPS). 



  • Revenues + 10% year-over-year
  • SRS two-year comp sequentially declined 1%
  • Operating Income +22%
  • Operating Margin +2.2% to 21.1% (highest 2Q ever)

SBUX: STILL TOP DOG - sbux americas pod1




  • Revenues unchanged, operating margin unchanged
  • -2% second quarter of fiscal year 2013 comps implies 2-year  comps negative
  • Emphasis is on improving profitability by refranchising (“sold to you!”)
  • Applying Americas “learnings” not trumping macro

SBUX: STILL TOP DOG - sbux emea pod1




  • Revenues grew 22%
  • Comps at +8% came in light vs consensus
  • Operating margin down -7.1% on investment spending on China growth

SBUX: STILL TOP DOG - sbux cap pod1



The Less-Good: Expectations, Food


The only slight negative stemming from what was, overall, a bullish conference call was management reigning in expectations for 2H13, but upping the official guidance. During the call management guided for third quarter fiscal year 2013 EPS of $0.50-0.53 and fourth quarter fiscal year 2013 EPS of $0.54-0.57, versus consensus of $0.54 and $0.57, respectively. The coffee cost tailwinds should continue well into fiscal year 2015 now, offsetting continued investments in growth-related initiatives. 


Food remains Starbucks’ Achilles’ heel.  The acquisition of La Boulange is a long way from being branded a “success”.  As of yesterday, there were 439 stores carrying La Boulange products, including all stores in the San Francisco Bay Area.  The company is planning a rollout of La Boulange pastries in the Pacific Northwest including Seattle in June, then will expand to cities including Los Angeles and Chicago, followed later in the year by New York and Boston. The company is on track to have La Boulange products in all of our U.S. company operated stores by the end of 2014.

Booking Gains: SP500 Levels, Refreshed

Takeaway: We'll continue to risk manage the range, booking gains on the way up to 1,603.

Positions: 12 longs, 7 shorts @hedgeye


In our real-time alerts product, the last ten booked positions have been gains. Certainly, that is better than bad and has been in-line with our market call this year that with #GrowthStabilizing equities in the U.S. should outperform.  Increasingly, our view is that stabilizing growth is morphing into accelerating growth domestically.


Admittedly, the Dallas Fed Manufacturing Index coming in this morning at -15.6 versus +5.0 expected was a soft reading and certainly a data point to consider.  That said, and more important to our thesis was pending home sales, which were up +1.5% versus +0.7% expected and saw a sequential acceleration from -0.4% in the prior month.


As we saw in last week’s GDP report, consumption was up +3.2% last quarter and is the key factor driving U.S. GDP recovery.  In fact, consumer spending contributed +2.24% of the total growth of GDP last quarter.  To the extent that housing demand remains strong and inventory continues to tighten, this will be positive for home prices, the consumer balance sheet and discretionary consumption.


This morning we have made three key changes in our Real-Time Alerts:

1)      Sold Budwesier (BUD)

2)      Covered Gold Miners (GDX)

3)      Bought Restoration Hardware (RH)


Currently, as outlined in the chart below, the TRADE range for the SP500 has immediate term support and resistance at 1567 and 1,603, respectively.  We'll continue to risk manage the range, booking gains as we move towards the high end. 


Daryl G. Jones

Director of Research


Booking Gains: SP500 Levels, Refreshed - SPX

European Banking Monitor: Green Means Go

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


Key Takeaways:


* European Financials - There are a lot of roses coming up in Europe lately. European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.




European Financial CDS - European banks were tighter across the board last week as Cyprus-related fears shifted from the back burner to ancient memory. Italian banks tightened an average of 30 bps, boosted by finally having a government.


European Banking Monitor: Green Means Go - ww. banks


Sovereign CDS – So much for Cyprus. European sovereign swaps continue to tighten. Italy, Spain, Portugal and Ireland all came in by 9-19 bps week-over-week, and are down 19-50 bps over the past month. Meanwhile, the U.S., Germany, France and Japan all remain a yawn with 1 bp moves.


European Banking Monitor: Green Means Go - ww. sov 1


European Banking Monitor: Green Means Go - ww. sov 2


Euribor-OIS Spread – The Euribor-OIS spread remained flat last week at 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Green Means Go - ww. euribor


ECB Liquidity Recourse to the Deposit Facility – ECB deposits were up 5.8 billion Euros last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Green Means Go - ww. facility




Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

OIL: Crude Mood

Brent crude oil (OIL) remains in bearish formation as the great commodity bubble continues to deflate. Despite a +3.3% bounce last week, we remain bearish on oil across all three of our durations: TRADE, TREND and TAIL. Our immediate-term TRADE risk range for oil is $97.18-104.09. What's interesting is how there are still hundreds of thousands of net long positions in the futures market that will ultimately need to be unwound. That will act as a catalyst for a sell off and helps drive our consumption thesis. Cheaper oil = cheaper gas = Americans consuming more and filling up at the pump.


OIL: Crude Mood - OILETF


In preparation for HOT's 1Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • 2013-2015 outlook: "Growth in RevPAR 5% to 7% and again important to recognize that this is much more rate driven than further occupancy driven. So, even though that number isn't maybe as high as it might have been earlier in the cycle, which is typical, it is I think a more profitable growth in RevPAR there. That leads to 10% to 12% growth in EBITDA and then 15% to 20% growth in EPS."
  • "If you look at where we are at the moment, we have 21 hotels in UAE. That is almost half of our portfolio in this region today. When you look at our pipeline, you see that our growth is actually more in the other countries in the Middle East. So 34% of our portfolio growth will be in the UAE and 66% is outside of the UAE, with this very strong focus on new markets like Tajikistan, Kazakhstan, Kurdistan. Until now, we grew 10 hotels per decade. From now on, we will grow 10 hotels each year. And by 2019, we project to operate 100 hotels in this region."
  • "If you look at the year 2000, this was still very much a U.S. company, 63% of our profits and fees came from the U.S. Today, it's well over a half coming from outside the U.S. Our goal here is also to be at 80/20 that's because that's where we feel the growth is being. In fact as you will see soon if you look at our pipeline, it's already 80/20, 80% of our pipeline is outside the U.S. and therefore, we're well on our way to achieving those goals as we open new hotels."
  • "It's important to note that we have a platform in all the key parts of the world now. So, we can grow without adding a lot of G&A. We've established sufficient scale by investing a lot in the last few years, and we will continue to invest where there's growth, like in the Middle East, like Africa, like Asia. But we have platforms everywhere now. There's no place in the world where we have not put a platform in to support the growth, which is why we've been able to only grow our SG&A 3% to 4% a year, while investing heavily in some parts of the world."
  • "In the last four years, we've generated almost $800 million in cash from the timeshare business, expect to do another $150 million to $200 million this year. So, we would have $1 billion in cash coming out of our timeshare business over the last five years. So we're running that business more for cash than earnings growth, and that has worked very well for us. 
  • "Bal Harbour, $460 million in cash last year, more cash this year. That's gone from being a place where we were putting money in to finish the project to significant amounts of cash coming out of it. That'll all be done this year in 2013, we hope to finish, sell out this year. It is not our intent to do projects like these, but in the meantime, it's been a major source of cash for us over the last couple of years."
  • "Our dividend today is the best among U.S. lodging companies. C-Corps, we have a 2% yield. We raised our dividend last year. We can sustain it. So, we are not only – incredibly strong balance sheet, we also pay a very healthy dividend in addition to having the capacity to do buybacks."
  • "Over the next three years, this supply situation is not going to change very much, which makes us optimistic that the recovery in the developed markets or the mature markets will continue for sure over this three-year timeframe and the situation in Europe is no different."
  • "Europe has demand challenges, but our most predictable business last year was Europe. It stayed very steady, growing in the 2% to 3% RevPAR range, it did not surprise. 2% to 3% is not spectacular growth, but it didn't go negative despite a recession. And a lot of that is because there's no supply."
  • "Our incentive fees are driven by significant amount of growth in the emerging markets."
  • [Timeshare]: "So assuming we spend $50 million to $60 million or $70 million in capital each year, we can continue to maintain the business at its current level of performance, while generating the $150 million to $200 million in cash that we have been generating."
  • "Incentive fee growth will be faster than base fee growth for all the reasons we've talked about. They're linked to profit, margins are expanding, profits generally grow faster than RevPAR at a typical hotel. That gets you to 9% to 12% franchise – management and franchise fee growth. Here again, coincidentally, one point of REVPAR, again cumulatively over three years; by 2015, would impact management and franchise fees by $20 million to $25 million."
  • "Our Vacation Ownership business, we're assuming that we will maintain a flat business"
  • "We have a stated strategy of selling hotels. We think the market is improving. If you look at the U.S., the public REITs have been very active and we've been very active in selling to them. The markets are good for public REITs to issue equity. There's no supply. So if you want to add hotels, it's better to buy them than build them."
  • "Our BBB rating.... 3.5x [leverage] is comfortable.  There is no question that we can have a higher debt load than we have today."
  • "There is no more debt to pay down."
  • "What does vary is the group transient mix. In the U.S., [transient] tends to be about a third of the business as group, whereas outside the U.S., it's probably more like 25% sometimes less. It's also a group that doesn't book as much in advance outside the U.S. as it does in the U.S. So, the group business is not as significant in many markets as it is in the U.S."
  • "F&B as you heard is far more important outside the U.S. than it is in the U.S., especially when you get to markets like these where the F&B mix can be 30%, 40% whereas in the U.S. it's probably more like 25%."
  • "If the debt markets really heat up and it sort of feels like they're heading in that direction, I could see some joint venture refinancing opportunities that might be another avenue to realize some value."
  • "We would assume that Europe would be at or below the low end of the (+5-7%) range. U.S. will probably be more in the middle of the range. Latin America is a mixed bag. We're still hopeful that China will reaccelerate once these big leadership transitions are complete. That will pull along a variety of other economies. So we're still hopeful that the growth market, whether it's the Middle East, Asia, China will be at the high end of the range."



  • "Business activity continues to rise but with very few new build hotels coming on stream. So occupancies remain at near peak levels. If the U.S. economy continues on this trajectory, the basic laws of supply and demand suggest that we'll see strong growth in room rates for the next few years."
  • "Europe remained at a stalemate during 2012 and we're not expecting much different in 2013, even though southern European bond spreads suggest rising confidence."
  • [China] "With that behind us, we're seeing demand pick up as government activity starts to resume and business returns to normal....In January, Chinese REVPAR was up 6%. The transition is still ongoing with significant meetings coming up in March when the new leadership formally takes over at multiple levels and new policies are announced. As such we expect the rate of growth to pick up as the year progresses and year-over-year comparisons also become easier."
  • "Corporate and retail transient momentum is strong. Rooms sold in opaque channels are declining improving rate realization. Group pace is tracking in the mid-single digits for the year."
    • "Leads were up 27% in Q4, booking windows continue to lengthen. Group business in the cycle has come back slowly but steadily and companies remain careful about growing their cost base. We expect that negotiated corporate rates will be up in the mid-single digits in 2013."
  • "Business travel in Mexico is up, and American leisure travel is coming back. We expect Mexico to be the engine of Latin American growth for us in 2013. At the other end of the spectrum is Argentina, where we have two large owned hotels. Argentina REVPAR is declining while local inflation hits 25%, squeezing our margins. The inflation devaluation gap is hurting Argentina's competitiveness, and hitting exports and travel. This is only likely to get worse until the devaluation resets the equation. Brazil hit a soft spot as China slowed, but is now recovering."
  • "In Q4 and into Q1, we have been making additional adjustments, incurring some severance cost of approximately $9 million in Q4 and potentially another $10 million in Q1. These costs are included in our SG&A growth estimate of 3% to 5% for 2013."


JCP: Good Move Out of the Gate For Ullman

Takeaway: Great near-term mo -- for the right reasons. But we'd rather get involved higher when we gain confidence it's going up 50%+.

With the stock raging in the final hour of trading on Friday – up 14.6% with volume more than tripling – it’s pretty clear that someone already knew that the company had taken a major step towards shoring up its liquidity.


But in looking at the transaction itself, it's positive any way you slice it, and it makes a ton of sense as Ullman’s first move out of the box as CEO. In addition, while the deal stipulates that the $1.75bn term load is securitized by real estate and ‘all other assets’ of the company – we think that the latter language of that agreement is irrelevant. We estimate that the lower end of JCP’s real-estate value clocks in at a little over $1.8bn, or $8.40 per share. Under a best-case scenario (which we have no fundamental reason to bank on) we get to $2.745bn, or a little over $12.53 per share. Nonetheless, the real-estate should cover the loan.


JCP: Good Move Out of the Gate For Ullman - jcpreti


Our Take On The Stock

Ullman and the stock are one and the same at this point. The good news is that he’ll be a stabilization factor as it relates to a) the balance sheet (done), b) talent retention, and c) stopping the bleeding in what remains of JCP’s core customer.  Even better news is that when JCP reports earnings in May, the company will blame any negatives on Johnson, and take credit for any positive changes on the margin. It'll be tough to spin the print in a way that does not favor JCP. Near-term momentum remains in JCP’s favor.


On the flipside, we’re still not comfortable enough with JCP's long-term strategy to have it on our Best Ideas list, as we’d need confidence in revisiting $2.50+ in EPS power in order to get us enough outsized upside in the risk/reward profile.  While we saw severe incompetence in pricing the existing business with Johnson running the show, the reality is that he had a vision as to what JCP could become, and it was one that made sense. It was no slam dunk by any means, and was riddled with execution challenges. But it was one where we could make financial assumptions in the outer years, apply a discount rate, and build up to over $3 in EPS power.


We’re now seeing Ullman solve the balance sheet issue – but that’s something that we were confidence would have been resolved under Johnson.  What we don’t have anymore, however, is a reasonable sense of what this company could look like in another 2-3 years. Despite what they say, it simply has no long-term strategy. There’s a short-term CEO who is in place to fix short-term problems.  While that happens there’s no reason why this stock can’t grind higher, and we think it will.  The ‘JCP is expensive’ call does not hold much water here.  That said, we’d rather wait to get involved in a big way when we could be confident in the BIG research call – like 50%+ over a 1-2-year period. When playing for that kind of upside, we're not concerned about getting involved a few dollars higher.  Until then, we'll trade the name. 

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.