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WTW: Staying Short

Takeaway: The other shoe has yet to drop. Management needs to make a decision; it's a lose-lose either way

WTW 2014 GUIDANCE

Guidance was a considerable disappointment, missing consensus EPS estimates by over 45% at the midpoint.  Below are the main guidance takeaways from its earnings call.

  • Revenue: ~$1.4 billion vs. consensus of $1.5 billion
  • EPS: $1.30-$1.60 vs, consensus of $2.72
  • North America: Revenue & Attendance down low 20% (vs. -11% & -15% in 2013)
  • Online: Revenue to decline high-teens (vs. 4% growth in 2013)
  • United Kingdom: Revenue to decline 20% range (vs. 20% in 2013)
  • Europe: Revenue to decline mid-single digits (vs. flat in 2013)
  • Marketing: to decline $20mm y/y (-7% y/y)

 

SHORT THESIS UPDATE

WTW didn't offer anything concrete as to how it plans to reignite growth, or address the growing competitive threat from free apps and activity monitors.  

 

Management chose to focus on Weight Watchers being the market leader while implying it has the best product in the industry.  While that could be true, it's not a question of the value of the Weight Watchers product, but whether the end-user values its product as much as the company is looking to charge for it.  

 

Free apps have been out there for a while.  That's not the main issue.  The main issue facing WTW is that access to these apps continues to climb; with smartphone penetration nearly doubling over the last 3 years to 74% in 3Q13 from 40% in 1Q11.

 

WTW: Staying Short - Smartphone penetration 3Q13

 

We don't believe WTW can right the ship without taking a more aggressive approach to membership growth and retention. It's plans to cut marketing in 2014 suggests it's going the opposite way, which we believe will only exacerbate it's member retention issues.  

 

WTW: Staying Short - WTW   Revenues vs. Marketing 4Q13

 

More importantly, WTW has a decision to make.  It can maintain its current pricing ($43 for a monthly pass, $19/month for its online product) and continue to cede share, or it can reduce pricing to become more competitive.  In either event, revenues will take a hit, whether it's membership or ARPU.  

 

Consensus is assuming that revenues stabilize in 2015, which suggests the street is discounting the secular threat facing WTW.  So we'll remain short from here, until the street finally gets it.

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

Thomas W. Tobin

@HedgeyeHC

 


PAR FOR THE 2014 COURSE: January Industrial Production

A sub-title in our analysis of the weekly Initial Jobless Claims data yesterday was:  #Deceleration:  Par for the 2014 Course.  HERE

 

And since I feel like I’ve written the same note highlighting the deceleration in the rate of improvement in the domestic, fundamental macro data about 20X to start 2014, it felt fitting to just recycle that Title also. 

 

INDUSTRIAL DECELERATION: That industrial production slowed in January isn’t particularly surprising given the soft ISM data and the slowing sales and rising inventory of auto’s  - See yesterday’s note for more detail  PANGLOSSIAN PIQUE: JANUARY RETAIL SALES

 

Consumer Durables, led by the 5% decline in vehicle production, was the biggest loser but Non-Durables, Business Equipment and Industrial Supply all decelerated on both a MoM and YoY basis.  Capacity Utilization slipped to 78.5% in January, with the -0.4% MoM decline the largest since August of 2012.

 

MAPPING THE SLOWDOWN:  We detail IP and Capacity Utilization data specifically in the table below but, with most of the significant data points for January now in, it’s probably more worthwhile to provide a summary refresh on the prevailing slope of improvement across the preponderance of the fundamental macro series. 

 

Perhaps the most efficient way to get a feel for the broader trend in the slope of growth is just to look at the Economic Summary Table (below) and simply observe if there is more ‘more red’ or ‘more green’ staring back at you. 

 

As can be seen, the sequential rate of improvement across most of the latest higher frequency data is Worse.    

 

Looking a little closer, even the data currently flagged as “Better” is less than inspiring. 

 

Let’s take a quick tour of each of the “Better’s” in turn: 

 

  • NFP:  NFP employment improved sequentially in January but that’s only because December was a brick.  Employment gains are decelerating vs the 3M/6M/12M averages. 
  • Consumer Confidence:  The data here has been middling and largely equivocal to start 2014.  The Conference Board measure improved in December, the preliminary Univ. of Michigan number for Feb was unchanged vs. January, and Bloomberg’s Weekly measure is tracking below the January average thus far in February. 
  • ISM Services:  ISM services improved in January but that was really only because it completely tanked in December as New Orders saw its largest sequential decline since 1980.  
  • Case-Shiller HPI:  Media pundits still (for whatever reason) love monitoring and citing the Case-Shiller home price data.  The fact is that the Case-Shiller HPI is one of the most lagging housing measures there is.  The “better” reading in the table below is actually a November number and we already have preliminary January Corelogic data – Home price growth as measured by Corelogic has been decelerating for 3 consecutive months.  
  • Inventories:  It’s a bit of a toss-up on whether to classify accelerating inventory growth as a positive or negative.  From a strict GDP accounting perspective, rising inventories can be a positive for reported growth.  However, when end demand is slowing and inventories are rising, the other side of that inventory build drags on both corporate profitability and reported economic growth.

 

So, on the back of the decelerations reported in Job Openings (JOLTS), Mortgage Purchase Applications, Retail Sales, and Initial Claims earlier in the week, Industrial Production and Capacity Utilization in January both deteriorated.

 

I haven’t checked but I’ll bet the dollar is down, gold is outperforming and #hashtags lamenting the distortive impacts of the weather are still in crescendo  – yep, par for the 2014 ……

 

Happy Valentines Day. Enjoy the long weekend

 

PAR FOR THE 2014 COURSE: January Industrial Production - Eco Summary 021414

 

PAR FOR THE 2014 COURSE: January Industrial Production - IC CU Table

 

PAR FOR THE 2014 COURSE: January Industrial Production - Confidence Table 021414

 

 

Christian B. Drake

c

@HedgeyeUSA



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NCLH 4Q 2013 YOUTUBE

In preparation for NCLH's FQ4 2013 earnings release Tuesday, we’ve put together the recent pertinent forward looking company commentary.

 

 

NEW SHIP PREMIUMS

  • Breakaway operates a healthy premium to both ticket pricing and onboard spend 
  • The new ships are pricing at about a double-digit premium to the Epic, and the Epic has been pricing at a double-digit premium to the rest of the fleet. 

2014 NCC

  • Looking to 2014, expect adjusted net cruise cost excluding fuel to stabilize and decrease in the range of 1% to 2%, as NCLH return to our more normalized dry-dock schedule and new build launch expenses roll-over year-over-year.

2014 EPS

  • Expect earnings to grow approximately 60% in the coming year.

1Q 2014 

  • The first quarter is booked a little bit behind.  There is a couple of reasons for that. One being that the Easter break, which is a big time off especially in the Northeast is toward the end April this coming year versus it was March 31 for 2013. So, that booking momentum has changed a little bit into the second quarter.
  • Solid pricing for 1Q. Pricing is above the mid single digits.

2014 YIELDS

  • Something that hopefully begins with a 4%, whether it's a low-4s or the mid-4s, it's too early to say

CARIBBEAN

  • In the first couple of quarters in the Caribbean, we have a healthy pricing environment right now
  • It is a little bit more promotional.

EUROPE

  • Pricing has been a positive. Feeling pretty good about Europe right now.
  • Mid single-digit range is a fair assumption

ONBOARD

  • Fourth quarter starting out is strong...has exceeded our expectations. Feel very confident with our onboard revenue.

$UA: Nightmare In Sochi For Under Armour?

Takeaway: UA execs are swallowing Tylenol.

UA - Under Armour Suits May Be a Factor in U.S. Speedskating's Struggles In Sochi

 

$UA: Nightmare In Sochi For Under Armour? - ua

  • "These suits—designed by apparel sponsor Under Armour and billed before the Games as a competitive advantage—have a design flaw that may be slowing down skaters, according to three people familiar with the U.S. team."
  • "Vents on back of the suit, designed to allow heat to escape, are also allowing air to enter and create drag that keeps skaters from staying in the low position they need to achieve maximum speed, these people said. One skater said team members felt they were fighting the suit to maintain correct form."

Key Takeaway from Hedgeye Retail Analyst Brian McGough

Talk about a tough break for UnderArmour. When an athlete in any sport fails to win, it's an easy target to blame the equipment. Are the claims here valid? Possibly. But at this point, that's pretty much irrelevant. All a brand needs is for elite athletes to point a finger, accuse the product of being to blame, and the brand is going to end up with a public relations problem.

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Did You Short $WTW Before the Bottom Fell Out? We Did.

Takeaway: Get Hedgeye. It pays.

Weight Watchers plummets over 25%... Worst day on record... Hedgeye called it.

 

Check out the video below from two weeks ago. Analysts Hesham Shaaban and Tom Tobin explained why WTW was a top Hedgeye SHORT.

 

Yes - it (literally) pays to watch HedgeyeTV.

 

While you’re at it, do yourself a big favor and sign up for a Hedgeye product today. There are worse ways to spend $29.95 a month. (Like buying a share of WTW.)

 


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