In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance




  • MIXED:  CCL disappointed investors today by not raising FY yield or EPS guidance and providing below consensus Q2 expectations. Investor expectations going into the earnings release and call were higher this time which is hurting the stock despite strong first quarter results. But is CCL playing the conservative card? We think so. Q2 is likely to be a pretty big beat which should push full year to at least the higher end of the guidance range.



  • MIXED:  While the Carnival brand recovery continued with better bookings, it is at the expense of lower pricing in the Caribbean. Carnival sacrificed occupancy to maintain price in F1Q.
    • Very pleased that the surveys show a significant recovery in the brand perception at Carnival Cruise Lines since the voyage disruptions...expect to benefit from it going forward.
    • Carnival recovery is a little bit ahead of that two to three-year timeframe that is conventional kind of thinking concerning recovery of brands that have suffered incidents.

1H 2014 TRENDS

  • WORSE:  F2Q yield guidance (-3% to -4% constant currency) came in much lower than expectations. While pricing remains low, it seemed to not have improved at all since last guidance.
    • Fleet-wide volumes during the last 13 weeks have been running well ahead of the prior year, outpacing capacity at prices that are lower.
    • Despite the recent high volumes, the cumulative bookings for the first half on a fleet-wide basis are still behind at lower prices.
    • Expecting lower yields in the first half
    • NA brands are impacted by challenging comps from the first half of last year, as they were booked prior to the voyage disruptions that occurred in February.  EAA brands face ongoing economic environment challenges in Southern Europe, the loss of the attractive Red Sea program and a close-in booking curve that is impacting their first half of '14.



  • SAME:  Onboard yields rose 0.8% (CC) in FQ1.
  • PREVIOUSLY:  What is built into the 2014 guidance was yields up a little over 1%.
    • Some of CCL's operating companies are continuing to roll out the all-inclusive drink program, the high-end photography and other things.


  • SAME:  For the reminder of the year, Caribbean is behind on both price and occupancy for the NA brands. Caribbean accounts for 50% of remaining capacity for NA brands.
  • PREVIOUSLY:  NA brands - behind on both price and occupancy


  • BETTER:  Costa's yield was up a couple of points more than expected in FQ1, mainly due to occupancy gains.  European economy is still choppy but has strengthened recently. 
    • Surveys were also very encouraging. They showed an improvement in brand perception.
    • Seeing lifting in yields and occupancy in Costa, but the recovery may take longer than the two to three-year norm


  • SAME:  Behind on price but remained well ahead on occupancy
  • PREVIOUSLY:  Behind on price but well ahead on occupancy.  


  • IN-LINE:  Behind on price but well ahead on occupancy and substantially ahead of 2013.  Europe accounts for 70% of remaining itineraries for EAA brands.
  • PREVIOUSLY:  Seeing a sequential improvement in YoY pricing in each quarter from the first to the third quarter for this program.  Booking by volumes for these European programs for the last 13 weeks have been nicely higher as well.


  • WORSE:  Japan underperformance will have an impact for the rest of FY 2014.  Japan deployments represents 1%. 
    • The yields in Asia are a little bit below the overall corporate average. Have talked a lot about a continued expansion into Asia.
    • Returns in Asia at the moment aren't where CCL would like them to be


  • SAME:  While Carnival did not change their cost guidance forecast for the year, some FQ1 costs have been shifted into FQ2.  Advertising spend for 2014 is now 20% higher than that in 2012. Advertising is clearly the main driver of higher costs for CCL.
    • Expect cost per ALBD to be up only slightly for 2014
    • Found ways to do some of the vessel enhancement and service, thereby reducing dry-dock days in 2014.
    • Concerning advertising, CCL clearly invested heavily in Carnival, but also invested across a number of other brands to generate demand. And that is continuing into the first quarter of next year. For the full year CCL'll be substantially ahead in 2014 in total advertising spend versus 2012.
    • Expect net cruise cost excluding fuel to be flat to half of inflation in the long term...that's a good starting point for guidance for 2015 

Save Money ... Eat at Home?

Editor's Note: This research note was originally published March 20, 2014 by Hedgeye’s Restaurant Team. For more information on Hedgeye please click here.  

The Bureau of Labor Statistics released its Consumer Price Index data for the month of February last week.  Despite a marginal improvement in the Restaurant Value Spread during the month, food away from home continues to be notably more expensive than food at home.  This suggests that cost sensitive consumers are more likely to frequent the grocery store and prepare their own food than they are to visit a restaurant and dine out.


Save Money ... Eat at Home? - money on plate


The value spread did, however, narrow sequentially by 30 bps in February to -1.3% as food at home inflation accelerated at a faster rate than food away from home inflation. Therefore, we’d surmise that eating out did become marginally more attractive over the course of the month. Overall, we view the release as less bearish, on the margin, for the restaurant industry.


Full-service and limited-service prices grew +2.3% and +2.2% YoY, suggesting that fast casual and QSR restaurants are becoming more attractive, on the margin, than casual dining restaurants to cash-strapped consumers.


Overall, retail grocery sales and  food services sales data continue to support our thesis regarding the negative Restaurant Value Spread, as grocery sales continue to increase on a YoY basis at the expense of food services sales.

Save Money ... Eat at Home? - 77

Save Money ... Eat at Home? - 88

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It's clear to us that management is low balling Q2 - commentary didn't match guidance. Lofty expectations are a problem for the stock, however.




  • Brand perception is most of the way back
  • Brand loyalty is almost 
  • Cautiously optimistic - expect pricing to improve
  • Costa - up 50% YoY on bookings volume.  Doubling of trust in confidence in core European market
  • NA brands caught up on occupancy while European brands are pushing out the bookings curve 
  • Will turn corner in 2H 2014
  • Advertising expenses for 2014: $600MM  (+20% over 2012)
  • Princess/Costa in Europe/ P&O Cruises launched new campaigns
  • FQ1:  
    • better revenue Caribbean/Continental European brands (5 cents) better NCC (4 cents); 
    • Capacity: +1.7%; 
    • Net ticket:  
      • -3.5% for NA brands - driven by promotions at Carnival brand; 
      • -2.5% for EAA brands - Costa increases offset by other European brands
    • Net onboard:   EAA: +4%, NA: slightly down, driven by lower occupancy at Carnival Cruise lines
    • NCC:  higher advertising spend but less than previous guidance
  • 2014
    • NA/EAA: bookings ahead by 20% at lower prices.  Carnival Cruise Lines and Costa led the way in bookings
    • 1st time cumulative bookings for next three quarters are higher than prior year as booking window widen; although they're still at lower end of historical bookings curve
  • F2Q
    • Tough comps due to pre-Triumph bookings last year
  • 2H 2014:  positive yields for NA and EAA yields
  • Expectations for Caribbean unchanged for rest of year despite better close-in performance for FQ1
  • Japan:  below expectations with Princess having 2 ships there.  Deployment represents 1% of annual capacity.
  • NA brands:
    • Caribbean:  Behind on price and occupancy; represent 50% for reminder of year; catching up on occupancy 
    • Alaska:  Behind on price but well ahead on occupancy
    • Seasonal European:  Well ahead on price and occupancy
  • EAA brands:
    • Europe (70% for remind of year):  Behind on price but well ahead on occupancy and substantially ahead of 2013

Q & A

  • For all 3 coming quarters:  higher volumes at lower prices
  • Lower occupancy at Carnival brand:  giving up a points of occupancy to maintain price
  • Historical bookings curve: 80-90% (current), 50-70% (1Q out), 30-50% (2 Q outs)
  • Carnival brand:  previously guided down mid-to-high single digits in 1H 2014 and turn positive in 2H 2014;  in Q1, Carnival turned out to be a little better than expected.  Forecast for remaining quarters remain unchanged for Carnival.
  • Costa:  occupancy up a couple of points more than expected in FQ1.  Had less ships in South America for FQ1 due to high costs there so they give up a little in yield to drive profitability.
  • Capacity growth:  +10% in the Caribbean for Carnival brand; overall market +19% in the Caribbean
  • Lower pricing happened in 2009 but pricing recovered in 2010.  They are not concerned about the lower prices.
  • Lost 10% in yields in 2009, got back half of that in 2010/2011.  Today, about 11% behind 2008 yields.  Their competition is close to 2008 yields.  
  • Switchers (New to Cruise) more price and media sensitive but smallest part of the cruiser base
  • Carnival brands:  ships sail full or almost full (as do their competitors)
  • Carnival brand recovery faster than expected
  • Costa brand recovery:  European economy still choppy but has strengthened
  • Cost savings:  hold off on forecasts, overall see further efficiencies 
  • FQ2:  impacted by higher capacity and promotional rates in Caribbean
  • FQ3:  will be negatively impacted by Japan
  • Costa  up a couple of points in FQ1 (15% of overall capacity)
  • FQ4:  expect costs to be down
  • FQ1/FQ2:  increase in costs was mainly driven by advertising
  • FQ3:  50% booked
  • FQ4:  1/3 booked
  • 2015 Caribbean capacity:  For FQ1, small decrease for CCL brands (Carnival Legend moving to Australia)
  • Refurbed ships getting higher premium pricing
  • Japan EPS impact:  assume Japan will "lose some money" but overall bullish 
  • Ukraine: has impacted some itineraries; 0.7% of overall capacity; Costa replacing May itineraries with Bulgaria/Istanbul; AIDA/Seabourn in F3Q itineraries will change as well.
  • Had not advertised Princess brand in over 10 years
  • Do not expect ECA higher costs to have a material impact
  • Dallas oil spill:  if channel opened up this wk and future cruises operate as normal, it might cost CCL 1 penny in F2Q
  • 1Q European yields (ex Costa):  were down just a little bit; UK made changes to their pricing programs and commission structure.  CCL expects an improving trend in UK overall.

Banging Your Head Against Wall?

Client Talking Points


Down Dollar means Up Yen --> Up Yen means Down Nikkei (down -11.4% year-to-date). Mother’s Index got hammered for a -5.7% loss last night as the Japanese dudes get margin calls. #GrowthSlowing in Japan continues as confidence falls.


The 10-year yield at 2.73% this morning after failing once again at Hedgeye TREND resistance of 2.81% on last week’s misplaced #RatesRising fears (that was last year’s call). The risk range for the 10-year is 2.62% to 2.81%. So, what do you do on down days? You keep buying bonds.


Are you banging your head against #OldWall debating why the Dow is down -1.8% year-to-date versus just buying Gold on the pullbacks? Gold is up +0.5% to +9.3% YTD. It remains one of the best ways to be long of inflation slowing US growth. TRADE support is $1,301/oz.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.


We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve), and strong underlying economic fundamentals. In follow-up BOE minutes, the asset purchase program was held flat by a vote of 9-0 and the interest rate was held unchanged by a vote of 9-0. This week the UK’s Office for Budget Responsibility updated its forecasts and sees 2014 GDP at +2.7% versus forecasts of +1.8% a year ago and +2.4% in December. It also increased the 2015 growth forecast to +2.3% from +2.2% previously. The OBR sees budget deficit at -6.6% of GDP in 2013-14 from -6.8% previously forecast, and sees debt peaking at 78.7% of GDP in 2015-16, and falling to 74.2% of GDP in 2018-2019. News out this week discussed Chancellor Osborne closing in on a deal that would see the City of London become an offshore center for trading the Chinese currency. The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.

Three for the Road


Home Prices in the UK continue to follow the path of purchasing power +6.8% y/y FEB vs +5.5% last #StrongPound @KeithMcCullough


"Life is the art of drawing without an eraser." - John W. Gardner


Malaysia Airlines has offered initial financial assistance of $5,000 per passenger to the families of Flight 370 passengers, and promised that additional compensation was being prepared. The airline is eventually likely to pay next of kin compensation that ranges into the millions of dollars per passenger. Under an international treaty known as the Montreal Convention, the airline must pay relatives of each deceased passenger an initial sum of around $150,000 to $175,000. (CNN)

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