Strong Dollar, Strong America

The US dollar is down today but has been on a bull run since the beginning of 2013. It remains in bullish formation and continues to drive down commodity prices. This is a positive catalyst for our consumption theory, in which consumption-oriented US stocks reap the benefits of Americans consuming more products.


With oil, corn, wheat and other commodity prices having fallen in price considerably from their late 2012 highs, consumers will come to find that they are spending less money when they go to fill up their cars at the pump and cheaper groceries when they are shopping. All in all, this will drive them to buy more with the increased purchasing power they now have through this form of passive saving. Strong Dollar = Strong America. Remember that.


Strong Dollar, Strong America - USD may1


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




  • WORSE:  While Hyatt obviously missed expectations, a lot of the noise and choppiness in the quarter was not a complete surprise except for the magnitude.  The impact from government austerity may have  impacted the quarter, but at 2% of business the future impact is limited. Group was weak but much of that was Easter timing and for the balance of the year it looks on trend with prior guidance. Renovation impact was higher but easing. Other things like non-comparable termination fees are frustrating because we can't model them. 



  • WORSE:  1Q was indeed choppy, more choppy than anyone expected.  The company did chalk it up to a lot of one time factors including the seasonal holiday shift.  Results should improve for the balance of the year
  • PREVIOUSLY: "We expect 2013 to be a year of stable growth. While we believe that the first half of the year has the potential be somewhat choppy, we're optimistic for the whole year based really on four primary indicators."


  • SAME:  Deal activity generally has increased.  Hyatt continues to focus on gateway cities mostly in the Amercias and Europe. 
    • "What some of the leading brokerage houses and others are saying, they expect transaction activity in the U.S. for instance to be up at least 25% this year versus last year. So you're seeing more transaction activity and therefore there will be higher ability for us to participate.  On a net basis, we've been an acquirer. Going forward, we'll take a balanced approach."
    • "On the buy side, we're looking at a number of potential new investments, including acquisitions and investments in joint venture hotels, both existing JV properties and new properties in the U.S., Latin America and in Europe. Deal flow is higher than it's been over the last few years and we are actively looking at investments in excess of $100 million in these types of projects."


  • SAME:  Performance divergence between long and short term bookings continued.  In the Q, for the Q bookings was down 12%.  In the Q for the year bookings were 8% lower.  Bookings for 2014 and beyond were up 13%.
  • PREVIOUSLY: "If you think about our business in North America particularly of full service hotels, 45% to 50% of that mix is group-oriented.  The two main segments of group business are corporate group and association group. On the corporate side, what you're seeing is low levels of visibility…  a lot of bookings for forward 90-day period. So short-term bookings and the bookings are tending to be a little bit smaller, both in terms of number of room nights as well as duration of meetings and I think some of that speaks to uncertainty on the part of corporations to make long-term forward commitments... With regard to associations that have more visibility into the future are making those longer-term commitments. So, you're seeing strength on the association side for future periods."


  • SAME:  Transient revenues grew 8% (ADR/occupancy equal impact).  Hyatt still expects transient business to be a strong driver of results in 2013.
  • PREVIOUSLY: "Markets and hotels that have been more transient oriented have outperformed. So, on the transient side, of course visibility is lower, generally folks don't make their transient room commitments until a few weeks before the travel dates. So, we have less visibility on that piece of the business, but strength continues to be positive.... Transient demand continues to bolster results."


  • SAME:  Overall group level production was up 3% in 1Q.  Group pace for the rest of 2013 is trending up in the mid-single digits.
  • PREVIOUSLY: "2013 group pace for full-serviced managed hotels in the U.S. is up about 4%. We're seeing significant levels of group production. December was our busiest group production month since late 2007, and January was good as well."


  • SAME:  Booking window is widening
  • PREVIOUSLY: "While the booking window is lengthening in certain cases, we're still seeing high levels of activity for close-in dates. For example, 40% of the group production in January was for the following 90 days."


  • SAME: The negative impact of renovations, Easter shift and other things had a negative impact on the quarter. Hyatt expects that for the next 2 quarters the impact from the factors discussed below will be at the low end of the $3-6MM range
  • PREVIOUSLY: "We expect certain specific items may negatively impact us in the first part of this year and the impact will lessen as the year progresses. These items would include: the ongoing renovations of several large managed hotels, both in the U.S. and the ASPAC region, market conditions in several international markets with significant new supply growth such as Baku and some cities in India, lower levels of government demand in some markets, specific areas of expense pressure, such as insurance costs and real estate taxes for owned and leased hotels, and a continued lag in the recovery of F&B spending as groups and banquet customers limit their spending. We expect these items to negatively impact us by $3 million to $6 million per quarter over the next several quarters, primarily due to lower fees as a result of renovations of managed properties. We expect that this level of quarterly impact will start at the higher end of the range, exacerbated a bit by the timing of Easter this year, and will trend down as the year progresses."



  • SAME:  Wages and food costs were managed well but as mentioned on last earnings call, Hyatt sees expectations for higher property taxes in 2013 as well as healthcare costs rising above inflation
  • PREVIOUSLY: "We remain very focused on and disciplined around how we're actually managing costs at our properties. And if you look at cost per occupied room, which is not the only measure that's relevant, but it is one metric, it's been flat basically since 2007. For our select service hotels, partly by virtue of some shared services initiatives, we've actually seen a decline over that period of time in cost per occupied room."


Confusing and disappointing quarter presents buying opportunity?


"Our first quarter of 2013 reflected continued improvement in average daily rates with comparable owned and leased average daily rate increasing 4% excluding the impact of currency. We continued to see strength in transient demand, however group demand declined, in part due to the timing of Easter as compared to the prior year."


- Mark S. Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation




  • For US full service hotels, transient was strong and transient revenue represented more than 50% of room revenues in the quarter in the Americas owned/leased portfolio revenues. Transient room revenue increased 8% with half of the increase due to demand and half due to rate.
  • Group segment: represents about 45% of their room revenues of US managed hotels.
    • Decreased 6% - all due to occupancy decreases, rate was up 2%. Flat group revenues in Jan & Feb and a 20% decline in March. 2/3rd of the occupancy decline was due to renovations (San Diego, DC and Dallas) hotels. Other factors contributing to the group level declining included the timing of Easter holiday and some cancelled business in connection in with which we were unable to fill gaps in our patterns.
    • In the quarter for the quarter booking were down 12% and in the quarter for the year bookings were down 8%.

    • Government related group demand was particularly weak - down 50% in the quarter and represented half of the decline for bookings for the year 
  • Had $4MM for termination and contract modification fees in 1Q12 which were non-recurring. Renovations at ASCPAC hotels also impacted results by $2MM
  • Several hotels also left the system which negatively impacted results by $1MM
  • Excluding the F&B impact, margins would have increased 100bps
  • Higher property taxes are an area of pressure as are healthcare costs which are rising above inflation
  • Group revenue production was up over 3%.  Bookings for 2014 and beyond were up 13%. Much of of the weakness on the short end was due largely to government business. Group pace for the final three quarters of 2013 is up in the mid single digit % range as of the end of the first quarter
  • In April, Group business increased 15% as compared to booking made in April 2012 - partly due to Easter timing
  • Booking window is lengthening
  • Expect group business to improve QoQ but still expect transient demand to be the driver for the Q
  • Expect geo-political volatility to continue
  • In China, austerity measures will continue to impact F&B revenues in the short term
  • Expect the impact of issues already mentioned to be at the lower end of the previously mentioned $3-6MM range over the next 2 quarters.  They also expect to begin to realize fee growth this year and they increased their guidance for new hotel openings from 30 to 35.
  • Paid a 10% cap on the Driscoll on TTM  basis
  • Sold 3 limited service hotels at a 7.5% cap rate on TTM NOI
  • The JV hotel that they disposed of in Asia had an imputed multiple of north of 20x
  • Continue to be active in repurchasing their stock - $16MM post Q close was purchased
  • Their obligation to purchase tendered notes is conditional on Hyatt issuing new debt at satisfactory terms



  • Impact of renovations and Easter on NA RevPAR: 
    • Easter (200bps impact in the Q)
    • Renovations (150bps in the Q)
    • They maintain the hotels in the comp set unless more than 25% of the rooms are out of service
  • Managed hotel renovations
    • NA renovations finish in the 3Q and 4Q
    • Asia renovations continue through 2014
    • Fee distruptions start to subside in 3Q 
  • ASPAC region:
    • if you take out the renovation impact out, the ASPAC RevPAR results would have been up 2%
    • Japan was up in the high single digits
    • HK was weaker - had renovations; same is true for Taipei and Singapore which also had renovations
    • China was down 8%: North China down over 10%, South China only down in the low single digits and East China down in the mid-high single digits
      • Lots of this is due to supply issues and austerity
      • Diplomatic travel and other travel to Beijing decreased in 1Q but that's starting to improve. Significant diplomatic flow of bookings at their hotels is really improving
      • Supply absorptions vary across regions
  • Group business:
    • Group exposure in the US: 45% for full service managed.  Slightly less for owned portfolio.
    • Outlook for 2013 is improving but short-term bookings are concerning.  
    • Group bookings are up mid single digits for the remaining 3 Q's of the year. 
  • Their float has actually expanded over the last 15 months
  • $100-120MM of investments relate to JV projects like Andaz Wailea
  • Incentive fees: 37% of NA hotels are paying incentive fees... 
  • Their M&A focus remains on gateway cities in US and Europe and increasing their resort presence.  Pursuing sale options for 6 full service hotels currently.  Overall they are encouraged by the transaction activity they see in the market.
  • Didn't buy the Driscoll with the goal of owning it forever
  • Affordable Care Act impact on their business: they have already absorbed some of the costs of broader costs. Expect HC costs to continue to exceed the rate of inflation for the next few years. Implementation costs are also evolving now, so a lot of things are still unclear. 
  • Owned portfolio: London had a really tough quarter - was down almost 10% while the US was up 4%. 
  • A couple of the resort markets where they had group weakness - were already in weak markets and then the impact of the group weakness was exacerbated.
  • Modeling disruptions for Asia will continue into next year. They will continue to try to provide visibility on that.
  • In terms of their owned portfolio, they are largely through the large renovations. No plans for big renovations in the foreseeable future.
  • Encouraged by what they are seeing on the group booking side, and the transient bookings are a source of huge support
  • For things that they can predict and have a perspective on, they have started to give more guidance around. Don't want people to be hyper-focused on the quarter but rather focused on the outlook for several years. 
  • The multiple of their business is the lowest amongst all public companies - partly due to their lack of given guidance
  • Plan to give more details about their outlook over the next few years
  • The disruptions they saw in 2011 and 2012 are much greater since they were on their owned portfolio. The renovations now are focused on very large hotels with lots of Group and therefore a lot of F&B business so the impact on mgmt fees is pretty high.
  • Why isn't their owned portfolio benefiting from the renovations they undertook in 2011-2012. They saw a lot of that benefit in 2012. They had about $25MM of disruption in 2011. 
  • EBITDA associated with the 6 hotels they are marketing is about $25MM (in 2012)
  • The net result is to see booking pace up 6% for the year -when you wash out April strength with March weakness from the holiday shift. Total production on group was up 3.4% for the year.
  • In 2012 Government business was about 5% and in 1Q it was 2% (but bear in mind that it was down a lot too). They don't expect further declines off of currently levels.
  • Vast majority of their owned portfolio is in the US. 



  • "Looking ahead, we continue to focus on improving performance at existing hotels and expanding in new and attractive markets. Owned hotels that have recently undergone renovations are performing well, particularly in New York and San Francisco. As the year progresses, we expect margins to improve as we benefit from increases in average daily rate."
  • Adjusted EBITDA was $131MM and adjusted EPS was $0.09
  • Comparable owned and leased hotel RevPAR increased 4.5% (4.4% excluding the effect of currency)
    • Revenue for comparable owned and leased hotels was negatively impacted by a decline in group room revenue and lower banquet revenue.
  • Owned and leased hotel operating margins increased 20 basis points.... Comparable owned and leased hotel operating margins were flat in 1Q13
    • Excluding expenses related to benefit programs funded through Rabbi Trusts and non-comparable hotel expenses, expenses increased 1.6%
  • Comparable systemwide RevPAR increased 2.4% (3.2% excluding the effect of currency)
    • RevPAR was negatively impacted by renovations at certain managed hotels and the timing of Easter.
  • Comparable U.S. full service hotel RevPAR increased 2.7% in the first quarter of 2013  
  • Eight properties were opened. As of March 31, 2013, the Company's executed contract base consisted of approximately 200 hotels or 45,000 rooms.
  • Hyatt repurchased 664,951 shares of Class A stock at a weighted average price of $41.32/share, for ~ $27MM.
  • On April 30, 2013, the Company's Board of Directors authorized the repurchase of up to an additional $200 million of common stock.
  • "Our global realignment has been completed and we are seeing the benefits of increased adaptability and innovation. We are operating under a structure that is able to be leveraged as we continue to expand. We believe that our current run-rate in SG&A is at a normalized level and we continue to maintain discipline on expense growth."
  • Pro rata share of unconsolidated hospitality ventures Adjusted EBITDA decreased 11.1%... primarily due to asset sales and weaker performance in certain international markets.
  • Americas Mgmt & Franchising Segment:
    • Group rooms revenue at comparable U.S. full service hotels decreased 5.8%.... Group room nights decreased 7.4% and group ADR increased 1.7%
    • Transient rooms revenue at comparable U.S. full service hotels increased 8.0%....  Transient room nights increased 3.7% and transient ADR increased 4.1%
    • Revenue from management and franchise fees was flat.... Fees were negatively impacted by the previously mentioned renovations at certain managed hotels, contract change or termination fees received in the prior period and fewer managed hotels in the first quarter of 2013 compared to the same period in 2012.
    • Adjusted EBITDA increased 4% YoY
  • Southeast Asia, China, Australia, South Korea and Japan (ASPAC) Management & Franchising Segment:
    • RevPAR was negatively impacted by renovations at several hotels.
    • Revenue from management and franchise fees decreased 13.6%.... Fees were negatively impacted by a contract termination fee received in the prior period and the previously mentioned renovations.
    • Adjusted EBITDA decreased 18% YoY
  • Europe, Africa, Middle East and Southwest Asia (EAME/SW Asia) Management Segment:
    • Revenue from management and franchise fees was flat in the first quarter of 2013 
    • Adjusted EBITDA increased 33%
  • Capital expenditures: $43 MM (Maintenance: $14MM; Enhancements to existing properties: $20MM; Investment in new properties: $9MM)
  • M&A transactions:
    • Acquired The Driskill in Austin, Texas for approximately $85 million
    • Sold three select service hotels, with an aggregate of 426 rooms, for approximately $36 million.
    • Sold its interest in a joint venture for a nominal amount. The joint venture owned one ASPAC hotel which the Company continues to manage under a long-term agreement. As a result of this sale, the Company's pro rata share of unconsolidated hospitality venture debt was reduced by approximately $23 million.
    • Entered into long-term management agreements for four hotels in France. In conjunction with the agreements, the Company entered into a seven year performance guarantee.
  • Subsequent to the end of the quarter, Hyatt :

    • Announced that it will redeem its outstanding 5.750% Senior Notes due 2015, of which an aggregate principal amount of $250 million is currently outstanding, on May 10, 2013. Redemption price is expected to be approximately $281 million.
    • Commenced a cash tender offer to purchase any and all of its $250 million 6.875% Senior Notes due 2019.
  • 1Q13: Debt of $1.2BN; Cash: $330MM and short term investments: $457MM
  • 2013 guidance: 
    • Adj SG&A: $305MM
    • Capex: $275MM
      • Including approximately $100MM for investment in new properties, such as Grand Hyatt Rio de Janeiro, Hyatt Place Omaha and other properties
    • Investment spending: $100-120MM
    • D&A: $340MM
    • Interest expense: $70MM (excluding impact of 2015 and 2019 Note redemptions)
    • Hotel openings: 35


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Sectors Outperforming The S&P 500

The S&P 500 hit an all-time high yesterday of 1596 and is up +11.7% year-to-date. But several individual sectors that are part of the S&P 500 are killing it with their performance during the same time period. The Top 3 performers are as follows:


  1. US Healthcare Stocks (XLV) = +18.68% 
  2. US Consumer Staples Stocks (XLP) = +17.31% 
  3. US Consumer Discretionary Stocks (XLY) = +15.12% 

As consumption continues to grow, Consumer Staples and Consumer Discretionary stocks stand to benefit the most from a stronger US dollar and weaker commodity prices.


Sectors Outperforming The S&P 500 - SPDRsectorperf


Last night, Bloomin’ Brands reported 1Q13 EPS of $0.50, surpassing consensus of $0.44 on 1.6% blended domestic company comparable restaurant sales growth (negatively impacted by 80bps due to Leap Year).



Noise in the Quarter


The bottom-line beat was driven by a lower tax rate, which added ~$0.03 to EPS. Looking forward, management guided to 2Q13 EPS of $0.21, below the consensus estimate of $0.27.  These discrepancies are largely due to noise on the tax line related non-operating items (deferred tax allowance). For the year, BLMN updated EPS guidance to at least $1.10 (from $1.06 prior) which is below consensus expectations of $1.11. While traffic (adjusted for trading day impact) was +3.2% at Outback, the FY13 guidance raise being smaller than the 1Q beat was a disappointment.


The highlight was the impressive same-restaurant sales performance at Outback. 1Q13 comps grew +2.5% versus consensus of 1.1%. In addition, there was one less week of advertising in the quarter. When adjusted for the trading day impact, comps were 3.5% at Outback. This was the 12th consecutive positive comp growth quarter for Outback, supported by continued growth at lunch and new menu initiatives. Fleming’s comps were well above the consensus 2%, and up sequentially, while Bonefish was in line with the Street as it laps very difficult 1H compares. Carrabba's continues to be a laggard.


Sales leverage, labor cost savings, and other cost cutting measures could not help mitigate food inflation as restaurant level margins were down 40 basis points.


BLMN TICKING ALONG - outback pod1




We are staying on the sidelines for now as earnings expectations seem to have limited upside.  Management has demonstrated its capability to grow same-restaurant sales but we believe that the stock is fairly valued at these levels.





Howard Penney

Managing Director


Rory Green

Senior Analyst



CLX - Expensive Stocks that Miss are Supposed to go Down, Right?

CLX reported Q3 ’13 EPS $0.05 below consensus along with “meh” constant currency sales growth of 1.6%.  Despite the miss, the company maintained full-year EPS guidance of $4.25 to $4.30 while shaving 1 pt off its sales growth forecast.  The company also provided an initial look at 2014 – EPS of $4.55 to $4.70 (consensus is already at $4.69, so 7.5% EPS growth at the midpoint of both guidance ranges).

With the stock down just 64 bps on this news, it feels as if we are taking crazy pills.


CLX - Expensive Stocks that Miss are Supposed to go Down, Right? - mugatu

We have a 2% top line growth asset that just told investors that it is an 8% EPS grower trading at 18.2x calendar ’14 numbers.  We just don’t get it.  We understand low volatility and the continued yield chase that we are seeing in the market, but CLX is fast becoming Exhibit A in the absurdity of staples valuations.

What we liked:

  • ’13 continues to be a very good year for FCF - $2.66 per year in FCF versus $1.62 per share in the same 9 month period in ‘12
  • Balance sheet remains tight – accounts receivable and inventories +0.9% and 0.0% year over year, respectively
  • Increased advertising as a % of sales 35 bps versus 2012
  • Costs are well controlled – SG&A as a percent of sales declined 119 bps year over year

What we didn’t like:

  • Missed consensus (EPS of $1.00 versus consensus of $1.05)
  • +1.6% constant currency organic sales growth (against admittedly the most difficult comparison of fiscal 2012).  However, the 1.6% print is likely within the company’s long-term sustainable growth profile.
  • EBIT declined in every segment in the quarter
  • Gross margin declined 50 bps
  • Valuation is absurd

Bottom line, god speed to the machines and whomever else thinks it’s worth adding to CLX at these levels – at some point, you are going to need all the luck you can get.


Call with questions,



Robert  Campagnino

Managing Director




Matt Hedrick

Senior Analyst

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