• run with the bulls

    get your first month

    of hedgeye free


SPB - A Miss, But Some Good with Not So Good

SPB reported Q2 EPS of $0.44, $0.08 below consensus.  The stock is not well-followed or particularly well-modeled, but the results are still likely below expectations.  More important than the EPS result, in our view, was that the company maintained its FCF guidance (the basis of the story is in an accelerating free cash flow profile) and continues to believe that it can delever its balance sheet by over $200 million in 2H.  With leverage to one of our key macro themes (housing) in the form of its newly acquired hardware and home improvement business and guidance of approximately $4.50 per share in FCF in ’13, SPB is an interesting story in a sector without a lot of interesting stories.

If this name were to be weak tomorrow (below $55), we would be buyers.  The name isn’t for everyone, admittedly – it trades by appointment and long/short investors would likely get frustrated having to hedge it out.  However, in terms of potential upside, we think it is definitely worth doing more work on the name.

What we liked:

  • Remains on pace for $240 million of FCF in ‘13
  • Still on track to delever balance sheet by $200 million in 2H
  • Good quarter in Global Pet Supplies - +3.3% constant currency growth
  • Newly acquired Hardware and Home Improvement business was +10.6% year over year top line

What we didn’t like:

  • Going through the press release and updating the model – tighten it up, people
  • EPS missed consensus, but that is not the meat of the story
  • Sales in just about every segment were down (but for the pro forma results in Home and Hardware and Global Pet Supplies) with total firm constant currency organic revenue declining 1.5%
  • Global Batteries declined 1.8% and the commentary indicated that the company gained share in North America – with consensus modeling just a 1% top line decline in ENR you can probably rest a touch easier tonight before tomorrow’s EPS result
  • Home and Garden declined 7.0%, confirming what we suspect (and is likely widely known) will be a weak quarter at SMG.  At $42, we suspect lighter results were largely priced in at SMG, at $45, we are a little less sure.  Also, SPB management specifically pointed out that the company does not participate in the fertilizer, seed or mulch big business – may have been to clarify, or may have been a sign those categories were weaker overall.

Bottom line, keep this one on your radar screens and be a buyer on material weakness.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Stock Report: Wolverine World Wide (WWW)

Stock Report: Wolverine World Wide (WWW)  - he sr www boxes


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow.


We think that the preailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


The stock is hardly washed out – we get that. But the reality is that this for a high quality globally diversified portfolio that has consistent 20-30% EPS growth and improving returns we don’t think that arguing a high teens multiple is a stretch. 18x our 2014 estimate of $3.55 gets us to a $64 stock, or 36% above current levels. Take that out to 2015 and 2016 and we’re looking at $75 and $95, respectively. When we juxtapose that alongside 15x what we think is a worst case $2.50 in EPS power, we’re looking 3 to 1 upside/downside over the course of a 12-18 months.



INTERMEDIATE TERM (the next 3 months or more)

There is currently a bifurcation between the Legacy business and the new PLG brands. Due to heavy exposure to a) Europe, which is in a perennial recession, b) the US industrial economy with its CAT, Harley and HyTest brands, and c) the cold-weather outdoor boot business through its Merrell brand – which has been shellacked two years in a row due to unfavorable weather – the Legacy brands are under pressure. But accretion in the PLG brands is well ahead of plan. The company is playing down the combination synergies – and in fact is dodging the topic at all costs. Our sense is that it wants 2013 to be the year of ‘accretion’ while ’14 and ’15 will be the year of synergies.


LONG-TERM (the next 3 years or less)

PLG was only 5% outside of the US under its former owner, but WWW’s legacy business was 40% outside of the US due to its strong International distribution network of 10,000+ points of distribution in over 200 countries.  As WWW layers these new brands over its infrastructure, we think it can drive double-digit growth in this billion dollar business while lowering unit costs. That gets us to 7-8% consolidated top line growth, 15-2-% EBIT growth, and 20%+ EPS growth.  Add on accelerated cash flow generation and subsequent debt paydown, and we think that this story has legs.  



Stock Report: Wolverine World Wide (WWW)  - he sr www chart



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




  • "New York's always been a dynamic market, continues to be. A lot of supply is coming on, mostly limited service-type branded supply, but that supply is getting absorbed. Probably has the effect of holding down rate a little bit, but clearly occupancy is being absorbed and those hotels are filling up. Right now, there's not much full-service construction anywhere in the nation, except for New York, and that's because developers can get their returns in New York, and that's why it's getting done there. So I think New York will be a great market. The other thing you have is Sandy, you still have some occupancy in there from Sandy that caused some compression in the city and pushed some stuff out."
  • "As of year-end, our Group pace was running about 6%, probably a little more rate than occupancy in that. We feel like we've got about 65%, 70% of our Group on the books for 2013 right now, which is where you want to be. That leaves about 30% to be booked in the year for the year. As you look at that in the year, for the year bookings with occupancy near peak levels, you'll get more pricing in there."
    • "You're seeing the window lengthen a little bit. It's not lengthening a lot, but it's lengthening a little bit which means those groups are saying, I need to book it now for the – or I'm not going to get those dates I want out there because the occupancy has strengthened, so we're feeling good about Group."
  • "At year-end, we were about 85% done... with the corporate, special corporate negotiations. We came in probably just north of 5%. We were hoping to be maybe a point or two higher, but you'd had the whole fiscal cliff thing at the year-end kind of inhibited that a little bit. But we feel good about where we came out, north of 5% is a pretty good rate increase. But the good news was as we talk to our major customers, they indicate they're going to be travelling more in 2013, than 2012. That their budgets for travel were up and that's a good sign. Like you said, it's about 11% to 15% depending on the brand of our total transient mix or total mix and it's good to see that there's going to be a little more volume."
  • [EDITION in London, Miami, and New York] "We'll invest probably in those three properties you mentioned about $900 million in total. About $250 million of that will be in 2013. They're in various stages of completion. London will be finished and opened probably by June of this year. Miami, which is on South Beach, probably first quarter of 2014. And then the Clock Tower in New York City will be probably early 2015, give you kind of timing.  We'll recycle those hotels, sell those hotels shortly after they open, anywhere from six months, three to six months maybe after that, and recycle that capital."
  • "We're a BBB company, investment grade. That gets us into the commercial paper market. That's where we want to be. So we try to stay at a 3 to 3.25 adjusted debt-to-adjusted EBITDA. So as EBITDA grows, that creates debt capacity for that."
  • "What you'll see as we have those growth in rooms outside the U.S. in Asia-Pacific, Middle East, you're going to see an acceleration of incentive fees for those hotels."
  • [Incentive fee] "We're projecting by 2014, we'll be back at that $370 million level. But it'll be more international, less domestic."



  • "What we've seen over the last couple of years is the government has been much more cautious about travel spending. They've been much more cautious about food and beverage spending when they do hold meetings. In fact, a number of our hotels, we'll talk about how government groups over the last year or 18 months won't order lunch for their attendees at a government meeting."
  • "In Asia, GDP growth has moderated a bit, but continues to chug along at better than 5%. With the leadership transition complete, we think China travel should regain its footing later in the year.  In Asia, we expect first quarter REVPAR to increase at a mid single-digit rate, strengthening a few points as the year progresses."
  • "We expect Thailand and Indonesia to remain strong throughout the year."
  • "In the Caribbean and Latin America region, we expect first quarter REVPAR will increase at a mid single-digit rate, improving to a mid-to-high single-digit rate for the full year. Here, we're more bullish than in October. While economic growth has slowed a bit in Brazil, we've seen lodging demand strengthen in Mexico and the Caribbean. We are pursuing hotel development opportunities in Brazil, Mexico, Colombia, Peru and Chile."
  • "In Europe, we expect some modest improvement in GDP in 2013, but given the tough comparison to the Olympics and other events, we are still expecting flattish REVPAR growth for the quarter and the full-year, similar to our outlook in October."
  • "In the Middle East and Africa, we are modeling a mid single-digit increase in REVPAR, consistent with our October outlook, with double-digit REVPAR growth in the first quarter. In 2012, we signed 11 new projects in the region, Africa's extraordinary wealth of natural resources drives economic growth and we expect to open our first three Marriott Hotels in Sub-Saharan Africa no later than 2014. The Middle East and Africa region represent 3% of our fee revenue."
  • In the Middle East and Africa, we are modeling a mid single-digit increase in REVPAR, consistent with our October outlook, with double-digit REVPAR growth in the first quarter. In 2012, we signed 11 new projects in the region, Africa's extraordinary wealth of natural resources drives economic growth and we expect to open our first three Marriott Hotels in Sub-Saharan Africa no later than 2014. The Middle East and Africa region represent 3% of our fee revenue."
  • "Worldwide for 2013, we expect to open 30,000 rooms to 35,000 rooms. Most of these rooms are already under construction or under renovation; nearly half of our anticipated 2013 openings will be in the U.S., including conversions to our Autograph brand and newly-built limited service hotels."
  • "Incentive fee growth will be likely constrained by more modest REVPAR growth in Europe and Asia than we've seen in recent years."
  • [2013 Group pace]  "Well, there's a little bit of difference quarter-to-quarter, to be sure, and some of that is driven by seasonality. I think the back half is probably a bit stronger than the front half."
  • [2013] "We would expect to return anywhere from $800 million to $1 billion share repurchase and dividends to shareholders."
  • [Cash level] "I guess, we usually try to stay around the $100 million, and as long as we have access to commercial paper markets, which are robust and our credit rating we do, we kind of finance the business with the commercial paper markets. And that's backed with a $1.75 billion revolver."
  • "F&B is growing notwithstanding and should continue to grow in 2013."
  • "We have seen on a limited service side financing getting a little better, but it's still under terms that are requiring the developer to guarantee the debt, provide credit enhancements. And the leverage isn't what it was way back when, so to speak. But that money is becoming available, especially from regional and local banks as the CMBS market has strengthened providing capacity for those. As to the full-service hotels, especially whether a suburban or even urban full-service hotels, we haven't seen new construction type financing. Now financing is starting to show up for asset sales, but not for new construction."


real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Change is the essence of time. Darden needs to get with the times and change its strategy. If the current leadership will not, as seems to be the case, shareholders need to find a management team that will. 


The lack of energy and confidence in the Darden management team’s presentation at the Barclays Conference was telling.


The highlight of this presentation was delivered before management began speaking. The moderator informed listeners that 74% of individuals in the room, according to a survey, did not own the stock. That was a bullish sign, but more confidence in management – or new management – is needed to get the stock going in the right direction.



The Multi-Brand Strategy’s Reign of Terror Continues


Listening to Brad Richmond speak today, it seems that not even Darden’s CFO now believes that the multi-brand strategy is an optimal path for his company.  The company’s assets continue to be under-utilized and we do not expect that many of the 74% of people in the room that were not shareholders this morning have bought the stock hand over fist on the back of today’s presentation.


Here are our takeaways:

  • The company can’t run 8 brands efficiently (EAT vs DRI Operating Margins)
  • Growth is counter-productive when the current asset base needs to be better-utilized (see MCD and EAT for examples)
  • The company is behind the times speaking about the “change in the competitive set” as if it happened last quarter
  •  Increased emphasis at Specialty Restaurant Group chains is ignoring elephant in the room – Olive Garden (How many of your problems that you ignored ever went away?)
  • Increasing complexity of portfolio detracts capital and focus from core business , which is heavily laden with operational issues that need to be resolved
  • A focus on turning existing Olive Garden stores around, not growing new ones, will grow shareholder value
  • 4% unit growth is still too much in this industry, for this company’s brands


Here are our questions for management:

  • Do you have any confidence in getting the Gap-to-Knapp positive again, for the Big Three brands?
  • Do you need to cut capex further?
  • Why are your operating margins 300 bps below Brinker’s when your AUV’s and restaurant level margins are higher? Surely SG&A must be out of synch with the business model.


Below, we show one of the most important chart for investors to see when pondering the ability of Darden’s management team to continue to pursue the multi-brand growth strategy:


$250 billion in EBITDA for $4 billion in Capex since the end of FY08! Shareholders, irrespective of how the stock has done, should view this as a serious offense on the part of management.


DRI LEADERSHIP DEFICIT - dri capex ebitda


Howard Penney

Managing Director


Rory Green

Senior Analyst




Apparel Cost Pressures: Impact of Bangladesh

Takeaway: The latest factory tragedy in Bangladesh -- the 5th largest apparel producer -- highlights continued looming labor cost pressure.

The building collapse in Bangladesh on April 24 that killed over 400 people was a horrible event in itself. That goes without saying.  But it also has negative implications for US apparel retailers and brands.  While Bangladesh accounts for a mere 0.2% of Global GDP (about the size of Utah), it is the fourth largest producer after China, accounts for nearly 5% of US apparel imports and is more significant than Honduras, Thailand and the Philippines. Apparel accounts for 80% of total exports for Bangladesh, making it more dependent on apparel than any other country in the world. Similarly, approximately 10% of the members of parliament have ownership interest the apparel factories, which clearly skews their allegiance. For example, there are only 18 inspectors overseeing the 100,000 factories in the Dhaka district (largest manufacturing hub), which employ 3 million people. This has allowed Bangladesh to be incredibly price competitive – below China in many categories – which was in part passed through to customers (and ultimately, to us).  The compromise has been safety, and the consequences have been tragic.


Our sense is that this latest tragedy will be the straw that breakes the camel’s back. We’re likely to see either higher wages, or more compliant working conditions – which costs money. If the Bangladesh government does not impose better standards on its factories, it’s customers might do it for them.  That’s especially the case as US companies are getting more conscious about their reputation on the world stage.  Ultimately, even though Bangladesh only accounts for 5% of our consumption, any change in wage in wage structure or working conditions are likely to have impacts beyond its borders as other countries follow its lead.


The bottom line is that this is not enough for us to take down earnings estimates for the group. But with margins at peak we need to be conscious of every little factor that could cause margin pressure.


Apparel Cost Pressures: Impact of Bangladesh - otexa1


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






  • "I think the most underrated part of our portfolio is our pure mass table business and our slot/ETG business, we now have 6,000 positions in the slot/ETG segment, which we think will, the next few years, grow to $1 billion of top line at a 48% margin."
  • "[SCC] "We did do one thing, we're working on that, is improving the premium mass space for gaming. It doesn't have a great premium mass area. We're taking one of the theater boxes and repurposing that for gaming and that would be a very upscale 90 table first quarter of 2014. That's the missing component in the VIP segment in the mass and SCC."
  • [Site 3] "We'll raise project financing, which we're in the process, of doing of about $2.7 billion, so an equity check of about $700 million. Hopefully, we'll be done with it based upon our development timeline by, let's call it, the middle of December of 2015. That's at least the target timeframe. It's a wonderful theme property, probably about 3,000, 3,200 hotel rooms, probably about 4.3 million square feet or 4 million square feet."
  • "If you look at the premium direct business in Macao, the reserve against that's about 40%."


  • "The non-gaming piece, it's a magnificent hotel property. It's got 2,600 keys. The ADR is approaching 375. It runs almost full, 95%, 98%."
  • "The mall - it's got very, very successful segments. It's making more than $10 million a month, $30-some million a quarter. But we think there's magnificent upside in the mall as we rethink the mall."
  • "We'll have [VIP] margins about 30%, but it's not like Macao, where it's easy."
  • [VIP] "We should make $350 million or $450 million a year out of that segment."
  • [Mass win/per day] "And if we get that number from $4MM or was it, I think $4.4MM or $4.5MM last quarter, we get that back up into a growth market at a 70-point margin, that's the sweet spot of our Singapore growth on the casino side."
  • "We're about 30% reserved, if you will, in terms of the receivable balance. We expected our reserve provision against receivables to grow in that 35% to 40% range."


  • "I think Vegas remains challenging."
  • "I still think the spend – we can sell rooms and we can occupy buildings. And it looks busy, but the spending habits still haven't come back where they were. The two upside businesses here today in Las Vegas are high-end Asian, which we're very fortunate to be participating in that. We had a wonderfully busy Chinese New Year's and we stayed busy. I mean Chinese New Year's used to be the most of the business, now it's year-round Chinese people coming to Las Vegas."





  • "I think we're starting to see it in the first quarter (benefit from new hires targeting premium mass gamer). I think we'll see it progressive throughout this year. Frankly, we're doing two things. We're revisiting our database in the premium mass. We're also opening offices. And I think you'll see that progress fully in 2013. I do think there's real opportunity to grow this segment materially as we get into 2013 and 2014."
  • "Singapore is the most challenging credit market from a perspective of, a) highly concentrated; b) very little legal help in the region to collect; and c) there is no junket buffer. So as I said in the past, I remain optimistic, but cautious."
  • "We've been talking about Tower 3 putting a new VIP facility up there for some period of time. I was in Singapore just a few weeks ago and we did receive a request for information from the government from certain government agencies about putting more details on the request, which we are now submitting. But I don't expect you'll see something like that happen because there's about a year construction period where it would happen. As far as additional rooms are concerned and additional buildings, we've had some conversations but nothing is quite moving forward at this point."

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.