RL: ST and LT Calls Are Very Different

Takeaway: We think expectations are low for 2Q14, and think that EPS growth will accelerate by 30%+ over six months. But we’re concerned longer-term.

CONCLUSION: We have a bifurcated view on RL right now. We like it from both a TRADE and TREND perspective, as expectations are too low headed into Wednesday's print, as RL guided to a msd decline in EPS, but in reality they’re going to post EPS growth of at least 1,000bps higher. Furthermore, the company will begin to show a meaningful acceleration in EPS growth over the next two quarters (near 30%) that should put it in the top decile of earnings growers in retail.


But from a TAIL vantage point, we're far less constructive. As much as we like how the company is executing on its long-term initiatives (international expansion,, and real estate), we're concerned about the recent changes in the C-suite. In the end, our degree of confidence in how the company will be executing three-years out is partially diminished.



So why are we concerned about management? Roger Farah shifting 50% of his time away from the company simply does not sit well with us.  The fact is that Roger has been incredibly effective over the past decade. Ralph might be the CEO, but Roger has basically executed on everything that is outside of the creative side of the organization. Yes, it's a positive that the company still has him given that it was a risk that he'd leave entirely. But we just don't buy the concept of a part-time COO. The way we see it, you're ether in or you're out. It's like being half pregnant.


On the flip side, the promotion of Chris Peterson is a big positive. He's one of the top 5 retail CFOs we've met -- which says a lot. At P&G he was heavily responsible for parts of the organization outside that of a traditional CFO (and his division of P&G was 5x the size of RL).


Similarly, Jackie Nemerov, who was also promoted and reports directly to Ralph Lauren, is far more capable than many on Wall Street likely give her credit for. There's no one at the company (perhaps with the exception of Ralph himself) who has earned more respect and loyalty by her direct and indirect reports. In the end, as incredibly effective as Roger has been over the years, the reality is that some of that was likely Nemerov adding to the size of his halo.


Lastly, we need to consider Ralph Lauren himself. He's one of the more successful CEOs in retail, and has created one of the best brands in apparel. But we can't ignore the fact that he just turned 74. There's not a whole lot of CEO's in the S&P that are over 70. In fact, there are only 14 CEOs in America who are older than 74. Not that there is a set formula for when a person needs to stop working, but it’s worth noting that the average retirement age for CEOs is between 60-65.


We're not questioning Mr. Lauren's competence. How could we? But he's such a powerful force inside the company, and the likelihood of him being the boss in another five years -- at least in his current capacity -- is not too great. We don't have a problem with this at all. But where we're more concerned is that we're not sure the Board has any clear succession plans for Mr. Lauren. That's probably because the Chairman of the Board is also the CEO -- and he has no plans to go anywhere anytime soon.


In the end, there are two things that are certain; 1) The company is executing and has increasing momentum in its business, but 2) The company is undergoing the most significant period of transition in the executive offices that RL has seen since before 2000. 





In preparation for HST's F3Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.







  • Room nights are probably about flat, but we've got a pretty solid rate increase for the second half of the year.
  • Over 50% of the [Group] rooms that we would expect to do in 2014 are on the books.  We're continuing to trend ahead of where we were at this time last year for 2014.
  • We are also pleased with the strength of our higher-priced group segments, as the weakness in demand has been largely focused in the lower-rated discount segment.
  • Short-term group will continue to be slightly weaker than last year.
  • We expect that group will be weak in the third quarter, as the middle of the quarter tends to be more influenced by discount business, and a few events such as the presidential nominating convention will not repeat this year.
  • Fourth quarter group bookings continue to be quite strong both in demand and in rate. Looking out further into 2014, both group room nights and rate continue to trend ahead of last year.


  • Advanced transient bookings continue to look quite solid.  Transient pricing should also begin to accelerate further.


  • We are hopeful of completing at least a couple more sales over the course of this year. And we will be intending to put about a handful of properties on the market in the fall with the goal of selling all of them.
  • We still hope to be a net buyer.


  • We expect Houston to continue its robust first half growth trends, as solid group and transient demand will continue to facilitate a shift in the mix of business to higher-rated segments.


  • We expect our Seattle hotels to have a good third quarter due to a solid group base on the books and strong transient demand, creating compression that will drive group and transient ADR.


  • We expect our hotels to continue to outperform in the third quarter due to a strong city-wide calendar.


  • With continued high transient demand, we expect our San Francisco hotels will see strong results in the third quarter.


  • We believe that Los Angeles should also experience third quarter – solid third quarter as transient demand strength persists.


  • In-house groups failed to materialize at the pace we had anticipated, but we expect our Boston properties to improve in the third quarter.


  • We believe the third quarter should continue to hold up relatively well when compared to the New York market.
  • Supply growth in New York will be fairly considerable next year. I think we're looking at numbers that approach 7%, which is a pretty big number, especially given the amount of supply that has hit over the course of the last three years there.
  • We'll find that New York is still going to be not as strong as we'd like it to be because of the supply coming into the market.


  • We expect our Chicago hotels to continue to outperform.


  • Given the continued weakness in government travel, we expect our hotels in DC to underperform the portfolio in the third quarter.
  • As it relates to D.C., we're still not seeing group bookings or convention bookings picking up for 2014. I think the general sense was that 2014 would be relatively flat to 2013.


  • Due to the flood, out-of-town demand significantly decreased. Therefore, we expect the Calgary Marriott will underperform in the third quarter.


  • We remain cautiously optimistic about the third quarter for our European hotels. We expect to see some occupancy increasing, while ADR will likely decrease due to the inflated rates during the London Olympics last year.


  • We are not forecasting F&B and other revenues to increase at the same pace as the second quarter....We're estimating in our guidance that food and beverage could range from 2.5% to 3.5%. The midpoint of that is obviously 3%, so that would suggest that we'd be about equal with what we achieved in the first half of the year.


  • We expect support costs to increase slightly for the remainder of the year, and we forecast that utility rates will likely increase.


  • If you look at it for the rest of the year, we're forecasting that we'll issue another 5 million shares for the rest of the year.

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This note was originally published November 04, 2013 at 07:46 in Daily Trading Ranges

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$RT: Goodbye, Ruby Tuesday?

Takeaway: We believe RT is in serious trouble and is likely headed for Chapter 11.

This note was originally published October 28, 2013 at 15:12 in Restaurants

$RT: Goodbye, Ruby Tuesday? - roob

Today, Ruby Tuesday announced the resignation of its Chairman Matt Drapkin.  Drapkin, who recently sold 1.45mm shares, joined the board of RT three years ago as an activist that, along with Carlson Capital, was intent on enhancing shareholder value.

He is now being replaced by the company’s current CEO James Buettgen, who left Darden in December of 2012 in order to resuscitate the Ruby Tuesday brand.  Despite an attempt to revive the business, RT’s operating fundamentals remain some of the worst in the casual dining industry.  To make matters worse, there appears to be little hope for a turnaround – RT has only seen one quarter of positive same-restaurant sales, on a two-year basis, since FY3Q08.


$RT: Goodbye, Ruby Tuesday? - pen1



Furthermore, we believe the largest impediment to the revitalization of this fourth tier Bar & Grill brand is Chili’s, which is run by a very strong management team.  In EAT’s recent quarterly earnings call and our subsequent call with CFO Guy Constant, the company announced its intent to pursue an aggressive strategy in order to grow same-restaurant sales.  This includes increasing TV media spend to support new products (including the upcoming Tex-Mex platform), implementing new online ordering for its “to go” business, and rolling out its delivery service.


Importantly, Chili’s will be moving its successful re-image program to the state of Florida in the coming months.  Currently, 10.9% of RT’s system-wide domestic units are in the state of Florida, making it the company’s most important state.  This means that RT is heavily exposed to any success that Chili’s may have in the region.  If Chili’s is able to steal significant market share in Florida, RT’s business will suffer.  If the past is any indication, this could very well happen.  Look at BJRI’s recent quarterly results – they were downright ugly.  We believe that Chili’s re-image program in California had a significant impact on market share trends in the region.  On the margin, this is all good news for EAT and their core brand, Chili’s.


$RT: Goodbye, Ruby Tuesday? - mt



RT’s management team has guided to an improvement in sales directionally throughout the year and the street has reflected that in its estimates.  We are highly suspect that this will unfold as planned, and believe that further disappointments are likely.


Capex has been reduced significantly since FY08, as the company is having a difficult time making ends meet.  EBITDA was negative in 1Q14 and the company continues to lose money.  We could see a major restructuring charge coming and believe that a significant number of store closings are needed.  If not, the company could be headed for Chapter 11.




Howard Penney

Managing Director

LINN & BRY Strike a New Deal

LINN ups the ratio and BRY is still committed to the deal, despite LINN's ongoing SEC inquiry.  In our view, the deal changes little fundamentally, but will likely serve to improve sentiment and confidence in LINE / LNCO in the near-term, particularly around its C-Corp E&P roll-up strategy.  Short LINE / LNCO remains a Hedgeye Best Idea.


LINN / BRY Revises Merger Terms......

  • Stock-for-stock deal ratio increased 35% from 1.25x LNCO shares to 1.68x LNCO shares (incremental ~24MM LINE units / LNCO shares)
  • No cash component
  • End date moved from 10/31/13 to 1/31/14
  • Unit / Shareholders expected to vote on transaction in mid-December
  • Conference call tomorrow, 11/5 at 11am EST, to discuss merger and 3Q13 results

Understated Maintenance CapEx = “Accretion”……LINN will offer BRY 1.68x LNCO shares per BRY share, a 35% increase in the ratio from the prior 1.25x.  That’s an additional 24MM LINE units (now 94MM new units) to pay a distribution to (currently $2.90/unit/year).  LINN states in the press release that, “The transaction is expected to be accretive to LINN’s cash available for distribution,”  however, we believe that LINN is materially understating BRY’s maintenance CapEx (last guided to ~$240MM per year), which is the source of all of the alleged “accretion.” 


BRY’s turn to focusing its capital exclusively on oil production has come at a high cost.  In 2012, BRY’s organic proved developed (PD) F&D cost was $41.38/boe (17.9MM boes added at a cost of $741MM), up from $24.56/boe in 2011.  LINN’s guidance for BRY maintenance CapEx of $240MM per year implies an F&D cost ~$15.00/boe if we assume exit rate 2013 production of 42,500 boe/d; in our view, $15.00/boe is inconsistent with BRY’s actual capital intensity, as we show in the tables below.  Assuming an F&D cost of $30 - $40/boe, BRY CapEx to keep production and reserves flat in 2014 would be $465MM - $621MM, resulting in LINE distribution per unit dilution of 9 – 25%.


LINN & BRY Strike a New Deal - linn1


LINN & BRY Strike a New Deal - linn2


Change in LINE-to-LNCO Tax Liability Payment……LINN amended the LINE / LNCO “Contribution Agreement” such that LINE will no longer pay LNCO a $6MM distribution in 2013, 2014, and 2015 to compensate LNCO for assumed tax liabilities: “Pursuant to the Contribution Agreement Amendment, LINN no longer has an obligation to pay LinnCo a special distribution for tax liabilities fixed at $6 million per year for 2013, 2014 and 2015 and instead, LINN and LinnCo agree to work in good faith at the end of 2013, 2014 and 2015 to determine whether and in what amounts LINN should make tax liability distributions to LinnCo to reasonably compensate LinnCo for the actual increase in tax liability to LinnCo, if any, resulting from the allocation of amortization, depletion, depreciation and other cost recovery deductions using the “remedial allocation method” pursuant to Treasury Regulations Section 1.704-3(d), with respect to the assets acquired in the Contribution” (11/4/13 Form 8-K).  LINN expects LNCO’s cash tax liability to be “approximately $0.00, $0.01 and $0.07 per share for 2013, 2014 and 2015.”


Kevin Kaiser

Managing Director

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