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RCL 2Q 2013 REPORT CARD

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

 

 

OVERALL:  

  • IN-LINE:  As seen by our recent pricing surveys, weaker Caribbean market and aggressive pricing is being offset by a steadily improving Europe market for Royal Caribbean. FY 2013 guidance remains relatively unchanged.  Caribbean pressures should not be any comfort, particularly to Carnival. 

RCL 2Q 2013 REPORT CARD - 111

RCL 2Q 2013 REPORT CARD - 2

 

ONBOARD REVENUE

  • BETTER:  2Q onboard yields were up a whopping 8.2%.  Gaming, beverage, specialty restaurants, shore excursions all outperformed.
  • PREVIOUSLY:  "We saw improvement in all categories for onboard revenue. Ships that have been recently revitalized and vessels sailing on new itineraries did particularly well."

CARIBBEAN

  • WORSE:  Mgmt reduced Caribbean expectations for the rest of FY 2013 as pricing competition has picked up recently
  • PREVIOUSLY:  "Over the last few weeks though, we have seen an improvement in booking activity and we are still forecasting record yields for the Caribbean."

BOOKINGS CURVE

  • SAME:  Booking window has been expanding  
  • PREVIOUSLY:  "On average, our guests are booking their cruise about two weeks earlier this year than they were in 2011 and 2012. In fact, the booking curve has looked strikingly similar to 2008 for the last several months."

EUROPE

  • BETTER:  Mid single-digits ticket yield growth is above expectations.  Mgmt is more comfortable with the outlook on Europe and is optimistic on this market in 2014.  
  • PREVIOUSLY:  "We considered our European summer revenue projections to have more risks attached to them in comparison to other spheres of deployment. Although there is still somewhat limited visibility for all of our summer deployment, at this juncture, in Europe, we are sufficiently ahead of 2012 on both rate and occupancy, to be comfortable that our European deployment is of comparable risk to our other programs."

CHINA/JAPAN

  • SAME:  one of the drivers which lowered yield expectations for the year.  The terriotory disputes have resulted in 30 modified sailings and increased bookings volatility.  China is 3% deployment for 2013.
  • PREVIOUSLY:  "Turning to China, the region that represents 5% of our capacity in 2013. The hostility between Japan and China surrounding the disputed islands in the East China Sea continues to affect our itineraries and our demand generation. We have now removed the Japanese ports of call from nearly all of 2013's North Asia program. As a result, most itineraries from our China homeport of Shanghai and Tianjin are calling only on ports of call on South Korea."

AUSTRALIA

  • SAME:  Increased capacity continues to pressure yields in this market
  • PREVIOUSLY:  "In the near-term is flat to slightly lower yield outlook for us for this year. we would expect that Australia, as a southern summer market, would continue to grow and be a mainstay of the cruise industry going forward."

PULLMANTUR

  • SAME:  Has been lagging its competitiors.  RCL recently opened a new head office in Latin America.
  • PREVIOUSLY:  "Pullmantur's performance is inevitably affected by that [Spain] very strongly and that's been a big disappointment and I don't see any quick turn away from massive improvement given the economic situation."

Initial Claims: Good, But Less Good

Takeaway: The rate of improvement in the labor market slowed notably this past week, but we're not going to get excited by one week of data.

This past week, rolling Non Seasonally Adjusted (NSA) initial claims were 8.8% lower than the prior year. This marks a decelerating rate of improvement vs the prior week, when rolling NSA claims were better by 10.6%. On a single week basis, NSA claims were 0.8% lower than the previous year, a sharp deceleration vs the prior nine prints of: -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 

 

Initial Claims: Good, But Less Good - roll

 

A possible explanation is that we're eclipsing the auto plant closings, which create significant NSA volatility. Recall that this year, due to heavy demand, there were far fewer auto plant shutdowns than in the corresponding periods last year. That said, the auto dynamic is a two-week phenomenon, so it wouldn't explain the deviation from the trend we've been seeing the last nine weeks.

 

Bear in mind that in less than six weeks, we'll shift out of the seasonally-adjusted data headwind period into the data tailwind period, which will last six months from September through February, 2014.

 

The Data

Prior to revision, initial jobless claims rose 9,000 to 343,000 from 334,000 week-over-week, as the prior week's number was revised up by 2,000 to 336,000.

 

The headline (unrevised) number shows claims were higher by 7,000 week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25K week-over-week to 345.25K.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower year-over-year, which is a sequential deterioration versus the previous week's year-over-year change of -10.6%

 

Initial Claims: Good, But Less Good - roll2


RCL 2Q 2013 CONFERENCE CALL NOTES

Nothing unexpected - Caribbean worse, Europe better, FY guidance roughly unchanged despite weak 3Q yield forecast. Mgmt avoided elaborating on weak Caribbean pricing and rather focused too much on China/Japan.

 

 

"While the operating environment has been frustrating, our bookings trajectory is looking good and I'm thrilled to see our cost initiatives beginning to pay off. Exploiting this positive momentum will help us take our returns and our profitability to the next level."

 

- Richard D. Fain, chairman and chief executive officer

 

CONF CALL

  • 2Q exceeded expectations; full-year 2013 guidance looking better
  • In recent weeks, competitive pricing has gotten more intense
  • Further cost controls initiative in 2014
  • 'Feels good to come to a inflection point both on revenues and expenses'
  • 2014 load factor and pricing higher YoY
  • Pullmantur new head office in Latin America
  • Cost initiatives will be on the overhead component
  • Want to achieve flat NCC ex fuel in 2014
  • 2012-2016 capacity growth will be 4% assuming no dispositions
  • Oasis and Allure of the Seas - most energy efficient ships in the world; their energy consumption is 25% better than rest of fleet; Quantum will be even more energy efficient
  • Better on board spending revs in 2Q increased 8.2% - gaming, beverage, specialty restaurants, shore excursions all performed 
  • Affinity-card accounting error in redemption of reward points:  allows cardholders to have reward points; 
  • 2nd half of year guidance:  Aggregate bookings and pricing are higher YoY. Europe doing as expected.  Pullmantur is the one lagging brand.
  • China/Japan territory dispute:  modified 30 sailings. Have increased bookings volatility.  China is 3% deployment for 2013.
  • Caribbean capacity: 25% in Q3 and 50% in Q4
  • Caribbean has been affected modestly but holding up well
  • Early patterns of 2014 are encouraging:  booked load factors are higher with slightly higher per diem
  • There will be more one-time costs in 2013
  • Retired $550 mm bond 
  • Will reduce net debt balance by $270MM in 2013
  • Grandeur of the Seas returned on July 12
  • Celebrity:  over past few months they have increased their marketing programs; good progress in cost management
  • 6 vessels left to be revitalized
  • Have refreshed slots on floor casinos

Q & A

  • Promotional environment:  overall, pretty consistent.  Has not seen acceleration in last two weeks. 
  • Europe:  largest capacity decreases are in the Med
  • Affinity's 7 cents adjustment is for past several years
  • More competitive pricing in the market, overall, not necessarily just the Caribbean
  • Mgmt refused to elaborate on North America pricing
  • Europe today vs 2008:  high single digits lower than that in 2008
  • Feel good about 1Q 2014; 2014 generally is looking good, particularly Europe
  • Capital Hill:  consumer protection dialogue yesterday; Rockefeller's proposal to close tax loophole is very preliminary

  • Had pared down Alaska expectations in April
  • Quite comfortable with resolving upcoming debt maturities - partially refinance, partially pay down
  • Australia:  capacity increases have pressured yields; market is in-line with mgmt expectations
  • Booking windows have been expanding
  • Caribbean pricing pressures - seeing changes 'on the margin', particularly in the fall (Q4)
  • Long-term capacity growth forecast - low to mid-single digits
  • Quantum bookings enthusiasm higher than when they revealed Oasis

Early Look

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Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

SAC Capital Indicted in Six-Year U.S. Insider Probe (via Bloomberg)

Trader and S.E.C. Lawyer Spar Over E-Mail (via DealB%k)

Housing Markets Where Cash Is King (via CNNMoney)

Missing red diary at heart of Italy's dark history (via Reuters)

Denmark Rejects S&P Warning to Tighten Rules for Covered Bonds (via Bloomberg)

 

Morning Reads on Our Radar Screen - co9

 

Daryl Jones – Macro

Copy of SAC Indictment (via Scribd.)

 

Josh Steiner – Financials

Hedge funds most bearish on treasurys in 16 months (via CNBC)

U.S. Jobless Claims Rose Last Week by 7,000 to 343,000 (via Bloomberg)

 

Tom Tobin – Healthcare

The entire #ACA premium picture, not just the Obama Administration's (via Twitter)

 

Matt Hedrick – Macro

Lululemon Courts Wall Street Jocks to Broaden Yoga Image (via Bloomberg)

 

Brian McGough – Retail

Under Armour Second-Quarter Net More Than Doubles on Higher Sales (via WSJ)

 

Jay Van Sciver – Industrials

United Continental profit rises, aided by lower costs (via Reuters)


INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD

Takeaway: The rate of improvement in the labor market slowed notably this past week, but we're not going to get excited by one week of data.

Slack Sails

This past week, rolling NSA initial claims were 8.8% lower than the prior year. This marks a decelerating rate of improvement vs the prior week, when rolling NSA claims were better by 10.6%. On a single week basis, NSA claims were 0.8% lower than the previous year, a sharp deceleration vs the prior 9 prints of: -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 

 

A possible explanation is that we're eclipsing the auto plant closings, which create significant NSA volatility. Recall that this year, due to heavy demand, there were far fewer auto plant shutdowns than in the corresponding periods last year. That said, the auto dynamic is a two-week phenonemon, so it wouldn't explain the deviation from the trend we've been seeing the last 9 weeks.

 

Bear in mind that in less than six weeks we'll shift out of the seasonally-adjusted data headwind period into the data tailwind period, which will last six months from September through February, 2014.

 

The Data

Prior to revision, initial jobless claims rose 9k to 343k from 334k WoW, as the prior week's number was revised up by 2k to 336k.

 

The headline (unrevised) number shows claims were higher by 7k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25k WoW to 345.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -10.6%

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 1

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 2

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 3

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 4

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 5

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 6

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 7

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 8

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 9

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 10

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 11

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 12

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 13

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 19

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 14

 

Yield Spreads

The 2-10 spread rose 4 basis points WoW to 223 bps. 3Q13TD, the 2-10 spread is averaging 193 bps, which is higher by 22 bps relative to 2Q13.

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 15

 

INITIAL CLAIMS: STILL GOOD, BUT LESS GOOD - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


CAKE – HEADLINE NUMBERS DECEIVE

CAKE remains on the Hedgeye best ideas list as a LONG.

 

The company reported disappointing results relative to expectations yesterday, but the headline numbers look worse than the underlying fundamentals would suggest. 

 

CAKE reported 2Q13 EPS results that were $0.03 lower than consensus along with a slight top line miss of -0.73%.  Same-store sales also fell short of expectations (+0.8% versus +1.7% consensus), as Cheesecake Factory comparable sales (0.9% versus +1.8% consensus) and Grand Lux Cafe comparable sales (+0.1% versus +0.7% consensus) both disappointed.

 

Management cited weather and slower industry trends as the two main drivers of weaker sales than expected in the quarter.  We don’t like to see anyone pull the weather card, but CAKE’s reasoning holds more legitimacy than that of some of its peers as its restaurants struggled to utilize their patio space at levels seen in the past. 

 

While industry trends are slowing, CAKE’s comparable sales have outpaced the industry for at least 18 months and we expect this trend to continue.  Although 3Q13 should be challenging due to slowing industry trends and a tough comp, we don’t see any fundamental issues within the business.  We expect sales to rebound in 4Q13 and carry on into 2014.  Management acknowledged that they will not make any desperate or unadvised attempts to boost sales in 2H13. 

 

Rather, they will continue to focus on the core of the business and building the brand for the long-term through new restaurants (at “A+” sites), menu innovation, quality food, and high service standards.

 

Below are some of our thoughts on 2Q13 results.

 

 

What We Liked

  • Increasing the quarterly dividend by 17%
  • Plan to repurchase up to $125 million worth of shares in 2H13
  • Full-year development plans remain on track to open 8-10 new restaurants
  • Anticipate a 50bps year-over-year improvement in FY13 operating margin
  • Expect full-year cost of sales to be lower than previously forecast due to moderate commodity cost inflation and favorable dairy prices
  • Management appears unfazed by the disappointing 2Q13 numbers and remains committed to their core business values

 

Red Flags

  • 2Q13 traffic was down -0.8%
  • Management lowered full-year EPS guidance down to $2.10-$2.15 from $2.12-$2.18
  • Softening industry trends and a difficult year-over-year comp are likely to be headwinds in 3Q13
  • Labor and other operating costs were up 10bps and 30bps year-over-year, respectively 

 

CAKE – HEADLINE NUMBERS DECEIVE - CAKE MONEY

 

 

 

Howard Penney

Managing Director

 


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

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