BUD: The Good, The Bad & The Ugly

This note was originally published April 30, 2013 at 09:39 in Consumer Staples

BUD reported first quarter  earnings per share (EPS) this morning and ABI BB is currently down about 3% in European trading – volume was weak across the board and volume guidance was soft relative to expectations.

What we liked:

  • Beat on EPS ($1.16 versus $0.98 consensus), but entirely due to below the line items (tax rate, lower interest expense year on year)
  • Pricing remained robust leading to constant currency organic revenue growth of +1.5% against a reasonably difficult comparison (Q2 comps ease, Q3 and Q4 stiffen) despite a decline in volume

What we didn’t like:

  • Volume softness across multiple regions save for Asia Pacific with organic volume declining 4.1% against the most difficult comparison of the year
  • Market share decline in the U.S. (0.5%)
  • Lack of operating leverage (unsurprising, given volume declines) as constant currency EBIT grew only 0.2% on constant currency revenue growth of +1.5%
  • Gross margin declined 1.33% against the most difficult comparison of the year
  • Cautious volume commentary on Brazil (industry flat to down low-single versus prior view of low to mid-single digit growth)

Stepping back for a moment and looking at BUD within the context of the broader consumer staples group, we continue to struggle to find names that we are comfortable with over almost any duration given what we see as the currently stretched state of valuations.  With BUD, we have good visibility on double digit EPS growth driven by continued strong pricing, merger synergies (eventually) and below the line items - even factoring in continued volume weakness.  The company’s FCF yield (7%) remains attractive relative to the group.  Based on that context, we are going to keep BUD on our preferred list.  We expect a couple of European sell-side downgrades, just because that is how those analysts generally roll, but we think BUD continues to make sense once the impact of this quarter shakes out.


Takeaway: HOT - we like it

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 - Despite selling 4 assets YTD and some FX headwinds, HOT slightly raised guidance on its core business.  Bal Harbour sales greatly exceeded expectations.  HOT maintains that it will return excess cash to shareholders and that debt levels will not be reduced further






  • BETTER:  Customers and developers are confident.  HOT remains upbeat on the US economy. Sequester has not had an impact given it's less 2% of its business.  HOT expects Q2 and 2013 US REVPAR to be in the high end of its 5-7% guidance range.
  • PREVIOUSLY: "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."


  • SAME:  Transient rates are up over 5%.  Group business continued to pace in the mid-single digits.  
  • PREVIOUSLY: "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.  Group business in the cycle has come back slowly but steadily and companies remain careful about growing their cost base." 


  • SAME:  1Q was similar to 4Q.  Mexico was strong (+10% REVPAR) but Argentina woes continue (-15% REVPAR).  Local inflation has significantly slowed travel into Argentina.  HOT expects Latin America to remain challenged in the near-term due to Argentina.
  • PREVIOUSLY:  "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."


  • WORSE:  REVPAR was up 5.4% (local currency), an acceleration from flat growth in Q4; Beijing was particularly soft, given its government exposure.  Southern China 1Q REVPAR was up 10%.  Q1 results in-line with its long-term outlook on China.  HOT expects China REVPAR to grow in the middle of the 5-7% guidance range for Q2 and FY 2013 from prior guidance of being at the high end of that range. 
  • PREVIOUSLY:  "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."


  • SAME:  Q1 REVPAR was soft (-1.3% in local currency), largely due to weakness in London, suggesting possible oversupply post Olympics.  Ex London, Europe was flat.  Southern Europe saw growth.  Groups are smaller and booking later.  1Q is not really a material quarter for Europe to its tough to extrapolate trends. HOT continues to expect Europe to exhibit modest (2-3%) REVPAR growth in Q2, but below its 5-7% worldwide guidance range.
  • PREVIOUSLY:  "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."


  • BETTER:  SG&A was 6% lower in 1Q.  They only spent $4MM of the $10MM severance costs guided for Q1. Higher costs are expected for the rest of the year.  HOT maintained its +3-5% SG&A guidance.
  • PREVIOUSLY: "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."


  • BETTER:  Vacation ownership is expected to generate ~$175MM in cash flow in FY2013 excluding Bal Harbour, up from prior guidance of $150MM for 2013. 
  • PREVIOUSLY: "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." 


  • BETTER:  HOT raised its Bal Harbour cash flow forecast from $100MM to $150MM for FY2013. 86% of the residences have been sold and only 40 units remain.  HOT expects to completely sell out by the end of the year.
  • PREVIOUSLY:  "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."


  • SAME:  Originated contract sales of vacation ownership intervals and the number of contracts signed were flat compared to 2012.
  • PREVIOUSLY: "Our Vacation Ownership business, we're assuming that we will maintain a flat business"



Takeaway: We like hotels generally and HOT specifically due to our outlook for more asset sales and share repurchases

Solid quarter and higher guidance. We still think the numbers are conservative


"Overall, the global lodging recovery continues along the trend lines we’ve been seeing. Tight supply is driving higher room rates in North America, and our footprint continues to expand in the growing economies. We are seeing more interest among real estate buyers for both vacation ownership and our owned hotels"


- Frits van Paasschen, CEO




  • Business is doing better than they expected across the board
  • They expect to complete the sell-out of BH this year. Only 40 units left.
  • In China business is generally picking up, 1Q RevPAR was up over 5%.  Results were soft in Beijing as it was more dependent on government business.  The government transition is not complete until March.  Meanwhile, across markets in the south, RevPAR was up nearly 10%.  The quarter's trends were in-line with the long-term trend HOT sees in China
  • Revenue grew by nearly 6% elsewhere in Asia. India was slower, Indonesia, Thailand and Malaysia were strong. Smart capital in India is moving to convert their brands.
  • 1Q European RevPAR was flat, ex London.  Weak start in London, suggesting oversupply post Olympics. Q1 is the off-season in Europe so its hard to draw conclusions for the full year based on these results. 
  • Argentina mess is spilling into Uruguay
  • North America RevPAR was up 6% and ex Canada up 7%
  • Government travel is about 2% of their business so the sequester is less of drag on their business 
  • Africa & the ME - RevPAR up over 7%. Business there is good. 
  • After their time in China, they increased occupancy by 6 percentage points in 2012 alone.  HOT doubled the number of SPG active members and SPG now accounts for 55% of our occupancy.  They grew outbound travel from China to their hotels globally by 52%.  And since the relocation, they've signed 54 deals, meaning our pace of signings is up by about 40%.  And 45 hotels have opened.

  • Hope to derive 80% of their profits from fees by 2016 by selling more assets
  • Will not reduce debt further and will use FCF to invest in high ROI investments and the balance will be returned to shareholders in the form of buybacks and dividends.
  • Transient rate was up over 5% in the quarter. Hawaii was particulary strong, N.E was weaker. Expect that NA will come in at the high end of their guidance range.
  • Group pace continues to pace along in the mid single digits. NA will remain their strongest region in 2013.
  • Expect modest RevPAR growth in Europe in 2Q.  Companies are watching their costs, groups are smaller and bookings are closer in. No signs that things are improving right now. 
  • China: As expected they saw business pick up in Q1. RevPAR increased 5.4% in 1Q in constant currency. New government has been asking officials to reign in their spending and lifestyles.  Harder hit are the north and western regions. Some impact from bird flu in the Shanghai region. They are monitoring the situation closely. Believe that new supply will be absorbed in the next 9-12 months. Expect China to be at the midpoint of their 5-7% guidance.
  • They will begin to break out greater China in their releases going forward
  • Impact on travel into Japan from North and South Korea issues
  • India remains sluggish but sequentially better
  • A&ME was the fastest growing region in 1Q.  UEA is booming with RevPAR growth of 14%.  Egypt was up 30% in the Q. Expect these trends to conitnue in 2Q.
  • Latin America was dragged down by Argentina which was down 27%. Argentina accounts from 15% of owned RevPAR.  Mexico was up 10% as US guests return. Expect LA growth to remain challenged in 2Q.
  • Owned portfolio: Impacted by Argentina. US owned hotels and in particulary Bal Harbor results were very strong. YTD they have sold an additional 4 hotels which will reduce earnings by $8MM from guidance given in 4Q. 
  • VOI: trends remain stable. Resort business was up sharply.  Cash flow from this business remain strong. 
  • Adding inventory in Orlando
  • Bal Harbour significantly exceeded their expectations. 
  • SG&A was down YoY, reduced costs due to restructuring and easy comps. Some of the severance costs and other costs were delayed this year. They incurred $4MM of severance so far vs. prior guidance of $10MM
  • Japan headwinds impacted FX



  • Were buyers earlier in the Q when the stock was under $60. They are opportunistic buyers of their stock.
  • Why did HOT's RevPAR in China materially outperform Smith travel numbers in China?
    • Geographic mix and they generally outperform the index with their brand. Mix of new hotels also helps.
  • Overall M&A environment: It's still a lumpy market on the UUP and Luxury asset side. Qualitatively, there is more interest than 12 months ago. Sense is that volume should continue to pick up.  They are still not seeing an active market for large portfolio sales (> $1BN), still a ones and two's market.
  • They do have the ability to sell most of their European assets and distribute that cash efficiently to shareholders. They have no cash trapped in Europe now. They should have no issues repatriating cash from asset sales.
    • Can structure sales as either asset sales or stock sales
  • VOI:  By having scaled back their business they have very favorable IRR's that nicely exceed WACC. Happy to keep the business in their portfolio given the cash flow generation and the syngeries. For example, they are moving the Westin St John's into VOI. More efficient than an asset sale
  • They have worked on their assets to make them ready for sale. In theory, they can achieve their asset sale targets before 2016 but it just depends
  • Regarding their buyback activity, look to past behavior as an indicator of future activity
  • US is better than they expected RevPAR wise. Trending at high end or netter in 2Q bc of holiday shift. China is a little softer. Europe is really unchanged - still projecting 2-3% growth since 1Q doesn't really matter.
  • Any impact from air traffic furlough from last week.  Think its was brief enough that they did not see an impact
  • Incentive fees: 60% of SS mgmt properties are paying incentive and about 75% outside the US. In the US, it's in the 30% range. 
  • Outside of group business, their visibility is somewhat limited 
  • Have some modest FX headwinds from Japan and Canadian and AU impact is also negative... all in to the tune of $3-4MM. They may also have some more severance charges. SG&A is also fairly lumpy.
  • In some cases they have a preferred time to sell due to tax issues or the need for renovations
  • Group Pace: low to mid single digit pace - same as before







  • Adjusted EBITDA was $315 million, which included $58 million of EBITDA from the St. Regis Bal Harbour residential project
  • Worldwide Systemwide REVPAR for Same-Store Hotels increased 5.0% in constant dollars (4.6%
    in actual dollars).... Systemwide REVPAR for Same-Store Hotels in North America increased 6.2% in constant dollars (6.2% in actual dollars).
  • In 1Q13, HOT "signed 26 hotel management and franchise contracts, representing approximately 6,200 rooms, and opened 18 hotels and resorts with approximately 4,000 rooms"
    • 20 are new builds and 6 are conversions from other brands. 
  • At March 31, 2013, the Company had approximately 400 hotels in the active pipeline (~100,000 rooms)
  • Special items... totaled a charge of $5 million (after-tax), included a loss of $8 million (pre-tax), primarily related to the sale of three wholly-owned hotels.
  • Excluding special items, the effective income tax rate in the first quarter of 2013 was 31.3%
  • Net income... included a tax benefit of $70 million, in discontinued operations, as a result of the reversal of a reserve associated with an uncertain tax position related to a previous disposition. The applicable statute of limitation for this tax position lapsed during the first quarter of 2013.
  • During the first quarter of 2013, 18 new hotels and resorts (representing approximately 4,000 rooms)
    entered the system.... five properties (representing approximately 900 rooms) were removed from the system.
  • Excluding owned hotels in Argentina, REVPAR at Worldwide Owned Hotels increased 5.3% in constant dollars (4.9% in actual dollars).  Excluding owned hotels in Argentina, internationally, REVPAR at owned hotels increased 4.2% in constant dollars (3.7% in actual dollars). REVPAR at owned hotels in Argentina decreased approximately 27% in constant dollars driven by economic instability in the country.  Excluding owned hotels in Argentina, margins increased by approximately 100 basis points.
  • Total vacation ownership revenues increased... primarily due to increased revenues from resort operations, the transfer of the Westin St. John from owned hotel revenues to vacation ownership revenues, and a favorable adjustment to loan loss reserves. 
  • Originated contract sales of vacation ownership intervals and the number of contracts signed were flat... The average price per vacation ownership unit sold increased 0.5% to approximately $16,200, driven by inventory mix.
  • HOT's residential revenues were $132 million.... realized residential revenues from Bal Harbour of $129 million and generated EBITDA of $58 million. During the first quarter of 2013, the Company closed sales of 38 units at Bal Harbour and realized incremental cash proceeds of $127 million associated with these units. From project inception through March 31, 2013, the Company has closed contracts on approximately 86% of the total residential units available at Bal Harbour and realized residential revenue of $939 million and EBITDA of $219 million. 
  • SG&A decreased ... primarily due to organizational changes in the second half of 2012 and non-recurring professional expenses recorded in the prior year. The Company continues to target a 3-5% increase for the full year.
    During the first quarter of 2013, the Company completed certain changes to its organizational structures
    in the Americas division. The Company recorded an expense for severance costs of approximately $4
    million associated with these changes.
  • Gross capital spending during the quarter included approximately $17 million of maintenance capital and
    $81 million of development capital
  • During 1Q13, HOT  completed the sales of three hotels; the Aloft and Element hotels in Lexington, Massachusetts and the W New Orleans - French Quarter for cash proceeds of approximately $61MM. These hotels were sold subject to either long-term management or franchise contracts. The Company recorded a loss of $8MM associated with these sales. In addition, following the end of the first quarter the Company completed the sale of the W New Orleans for cash proceeds of approximately $65MM.
  • In 1Q13 and through April 5, 2013, HOT repurchased nearly 1MM shares at a total cost of ~$56MM and a weighted average price of $59.35 per share. As of April 5, 2013, approximately $624MM remained available under the Company’s share repurchase authorization
  • At March 31, 2013, HOT had gross debt of $1.275 billion, cash and cash equivalents of $529 million (including $142 million of restricted cash)... including $472 million of debt and $20 million of restricted cash associated with securitized vacation ownership notes receivable, was $1.198 billion.

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Down With The Euro

The Euro broke our TAIL line of support at 1.316 this morning and is capable of further downside, particularly if a rate cut is enacted by European Central Bank Chief Mario Draghi. All eyes remain on Europe and its de facto currency as the US dollar appreciates in value against it.


Down With The Euro - FXE ytd

Argentina: Teaching Us A Lesson

Argentina has one of the best performing equity markets in the world. Over the last twelve months, their Merval Index (Argentina’s equivalent of the S&P 500) has put up +67.9% in gains as the value of the Argentine Peso (we are bearish on the currency) plunges against the value of the US dollar.


Argentina: Teaching Us A Lesson - Equities YoY


While the country’s stock market is on fire compared to America, the country’s underlying economic situation leaves much to be desired. In fact, much of the equity market strength is being driven by strict capital controls and fear of eventual public confiscation of household deposits. Last week, Argentina turned to the International Monetary Fund (IMF) for a $400 million cash deposit in order to increase their allocation to an emergency line of credit of sorts. Though the country had $39.8 billion in reserves, Argentina is drawing on those funds for bond repayments ($30 billion since 2010) and it just hit a six-year low. Essentially, the country is fiscally under the gun and will remain in a tough spot as long as Cristina Fernandez is president.


Argentina: Teaching Us A Lesson - FX YoY


Buffalo Wild Wings reported a disappointing quarter last night with EPS coming in at $0.87 versus consensus of $0.99.




We believe this stock is a short here ($90.20/share) as the company is expanding its new wings-per-portion serving practice. Despite the sequential comp acceleration from 1Q to April, we believe there are several overriding factors that will drag on the stock’s performance over the next 3-6 months:

  • The new service initiative (wings by weight) has been tested in only 40 stores and produced flat-to-down comps vs +1.4% co-op comps but is being rolled out to all co-op stores by end of June
  • Traffic was negative in 1Q (-290 bps), April (-130 bps excl Easter)
  • Flex pricing will likely materially impact guest experience (5 wings vs. 6, 10 vs. 12, etc.)
  • Consensus is expecting +1.2% and +1.6% traffic in 3Q and 4Q, respectively
  • Labor costs increasing due to training costs related to “guest experience model” (wings by weight)
  • Margins are likely going to deteriorate further from here
  • Wing prices declining will mitigate some margin pressure but labor pressure seems significant and if
  • Mgmt has no credibility when it comes to guidance after 2012
  • FY13 EPS growth guidance of +17% (unch’d from prior) is a Hail Mary after an 11% decline in 1Q13


Notable Earnings Call Quotes:




“Well, I think we're just being cautionary.  We did see 80 basis points in the first quarter. We definitely have full attention to how we're rolling out this guest experience business model. And so we do believe that there is improvement to have on that as we go through the year. We're just not confident at this point in the second quarter on whether or not we'll see all of that. So we do think that for at least the near term an increase similar to Q1 is the most appropriate guidance.”


HEDGEYE: In response to an earlier question on guidance provided in February, management said, “We wouldn't have had a full view of our labor at the time that we did our February earnings call.” We would echo those sentiments with regard to labor for the balance of 2013. We believe the likelihood of management underestimating the impact of different initiatives on labor is high.  Examples include training staff to handle the flex pricing initiative, training an additional staff member as “guest experience captain”, etc. In 2012, management underestimated cost headwinds and we think labor is the 2013 iteration of that same mistake.





“Initially, same-store sales are flat to just slightly down. What the most important thing to the guest is to really understand how many wings they're getting... Well, we do plan to roll it with our July menu rollout and if wing sizes stay at the same place they are today, people would see a 5, 10, 15, 20 count as compared to the 6, 12, 18, 24. But if wing prices are different when we get to July, that could change – sizes, yes.”


HEDGEYE: What if the rollout across the system has a similar comp impact, in terms of the underlying trend? We expect that co-op comps in the back half of the year would be 2.5% and 2.9% for 3Q and 4Q, respectively. Consensus is modeling 3.3% and 3.6% for 3Q and 4Q co-op comp sales growth. Judging by the estimate of the serving portion size changes, outlined in the quote above, we expect this change to have a material impact on brand perception.



Earnings Recap


The table, below, provides an overview of the quarter’s key results versus what consensus was expecting.  Revenues came in ahead of expectations thanks to better-than-expected comps and April comparable sales growth is tracking at 5.2% versus the Street at 3.8%. An important caveat is that the Easter shift helped by 150 bps and price is running at 5% so traffic is down 130 bps.




Howard Penney

Managing Director


Rory Green

Senior Analyst




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