• run with the bulls

    get your first month

    of hedgeye free





Review of 2Q09 results:

Third quarter in a row where costs saved the day

Efforts to reduce costs have been pervasive

Expect to open towards the low range of their hotel pipeline guidance

  • See growth in Asia, Africa and ME

VOI aggressive cost cutting helped them realize profits that were only down 20MM

  • Hawaii is showing modest improvement
  • Visitation trends also look like they are stabilizing

Cost cutting details:

All about flow-through at the property level

Keep saying its “permanent” – sorry we don’t believe it

Majority of the savings are sustainable aside from some “small things”

  • Incentive comp for example

Look hard at capital projects

  • Bal Harbour – evaluating their options – sounds like a downsizing to me


I’m sorry but this whole part of the call was total fluff

  • “Growth begets growth”
  • “Creates a network effect”

Transforming W into a global powerhouse from its NY roots-plan to double the footprint

40 Alofts will be open by year end

Almost done retooling Sheraton… they say this every year, once they finish “retooling” the base they need to start all over again


He’s said Permanent cost reductions about 4x now….

Liquidity/Balance sheet:

Very well positioned from a liquidity standpoint

Good rate on timeshare note – of course the rate is good.  they have a 30% residual that they are holding providing support to the senior notes that were sold

Another securitization expected in 4Q09/1Q2010

Leverage ratio around 4.0x, post quarter total debt was $3.5BN, and expect to get to $3.2BN by year end

Expect year end leverage to be 4.3x and, even if 2010 EBITDA declines, still expect to be in compliance

Sale of the W – spoke about the how accretive the sale was and how big the multiple was… No need to comment here – you guys know what we think

In discussion on non-core assets, (some where they won’t keep their flag – capex issue I’m sure)

Claim that transaction market is improving

2Q Details:

Swine flu impact was $10MM roughly (50% in Mexico)

Occupancy stabilized in 2Q09, but rate continued to deteriorate accounting for over 60% of the RevPAR decrease

Mix is shifting to more rate sensitive leisure business

Early indications that group is coming back

  • Feels like a slow recovery though

Guidance implies that RevPAR declines continue to moderate

When they get to Q4, if rates stay constant the headwind from FX turns into a tailwind

Will continue to be impacted by Swine Flu in 3Q09, reducing revenues by $5MM or so

Things should return to normal in 4Q if there are no outbreak flare-ups

Political instability in the Asia/ ME have impacted RevPAR

Second half expectation for Asia have been lowered, but ME is performing relatively well


  • Tour flow has stabilized but consumers are gravitating to lower end products
  • Increased reserves for loan losses

SG&A will be down less in the back half as comps become difficult


 Asset sales – how many core/non –core?

  • Very advanced discussions on non-core assets – defined as hotels where they don’t care about keeping the flag (that helps sales price when assets are unencumbered)
  • Also mentioned selling non-hotel businesses

Pipeline – how many international/conversion/under construction /etc?

  • 2/3 is international
  • Conversions are a lot less than 10% but expect that number to rise
  • 50% is financed and under construction

American Express deal?

  • Rewards card in place for several years
  • Mutual desire to extend arrangement, in exchange for extension
  • AMEX bought $250MM worth of points to use over time and paid for them cash…
    • Ah… that makes sense… that’s how they back fill some rooms
    • Accounting: will be in other liabilities

Timeshare – haven’t reduced pricing like (MAR for example)

Broader economic commentary

  • Do feel like recovery from this downturn won’t be as quick and sharp as in the past, since the growth will occur at the same time as deleveraging

Owned hotel margins/ threat to fees

  • Don’t do performance guarantees – have almost none
  • Incentive fee mix in the US linked to preferred returns is pretty small as a % of mix
    • International contracts are based on % of GOP (gross margin dollars) get cut from day 1 or so… so its hurt by flow through – so will drop at 2x international revpar (on a constant dollar basis)
  • Haven’t rolled out lean operations across the entire system, but really need rate growth to help owned margins
    • Started in March/April last year on the cost cutting – and have been doing so ever since
    • Already implemented the big savings, but some savings take longer to implement and have the attitude that there is always more room to cut costs

They aren’t interested in buying any assets right now, would find a partner if anything – don’t want to use their own balance sheet

Group booking pace:

  • June has been better than the rest of the year, but the group pace is trending in line with competitor guidance, down high teens/ 20% range
  • Think that cancellation rates going forward will be less

Other management fees

  • Termination fees helped fees this quarter

How is the rate promotion going? (50% off, I believe)

  • Short term tactical effort to stimulate interest

Sheraton RevPAR declines

  • Blaming the underperformance on renovations

400 bps FX benefit in the 4Q if FX rates stay constant

Union contracted wage growth is 3-4% and roughly 1/3 is under collective bargaining agreements in the US

Initial Read on Amazon / Zappos

Last night Amazon.com announced its intent to purchase Zappos.com for $847m in an all stock deal.  This deal is worth looking at on many fronts.  On the surface this is another data point in the large volume of tech M&A.  However, this actually transcends both tech and retailing by the very nature of what Zappos does, and that is sell footwear, accessories, and apparel. 

We have said in the past that we expect strategic deal flow to continue and we believe this still holds true.  Direct-fulfillment infrastructure and assets are valuable to those that are:

  1. Late to the game of e-commerce.
  2. Saddled with third party arrangements that outsource fulfillment and hosting.
  3. Looking to leverage growth in what is now a well-defined, legitimate, and growing way to distribute products directly to consumers. 

One thing is clear (as judged by the simple fact that Zappos is doing $1bln in revs and most people on the Street had no idea), ecommerce is alive and may actually be nearing a point where profitability on a wider scale is no longer elusive.  Scale is the key here and the consumer has voted for the ease and transparency embedded in the online shopping experience.  

So what is this company with a silly name called Zappos?  Many of us know of it, perhaps ordered a pair of shoes from the site, and (very) occasionally have heard the company mentioned by a wholesaler.  In reality, there is little public information about the company except for few facts that we can piece together from interviews with the CEO or just by poking around the site.  It is widely thought that Zappos generates approximately $1bln in gross revenues, $625m in net revenues, and $40m in EBITA.  The company was founded in 1999 and has been primarily funded by Sequoia Capital, which has invested most of the $49mm the company raised since its inception.  We’re sure you know Sequoia from its other more prominent investments in Google, Yahoo, YouTube, and PayPal. 

Most eye opening is the size of Zappos, which in just over ten years has a revenue base nearly as large as Genesco ($1.6bln), DSW ($1.5bln), and The Finish Line ($1.2bln).  The selection is unprecedented with basically every footwear brand under the sun offered on the site along with more recent introductions in apparel and accessories.  Clearly this is a scalable and flexible platform for Amazon to leverage its current and future direct fulfillment verticals. 

Initial Read on Amazon / Zappos - ZapposComps 7 09

Traditional retailers cannot ignore this transaction.  Which leads to the question, what’s a retailer to do as it reads the press release valuing Zappos at $850mm?  It’s clear to us to be competitive in the space you can either build or buy.  Most companies have built, but with a brick and mortar mentality.  Assets born out of the .com era and not 7th Avenue are likely to be more flexible, innovative, and creative.  Moreover, online only operations are likely to have been built at a lower cost than companies that have built direct businesses as “add-ons” or “extensions” of core legacy operations. 

Now to the touchy, feely portion of this.  We’re not ones to bank solely on culture, but the word was mentioned 21 times in a letter to employees from the Zappos’ CEO explaining the rationale and logistics of the transaction.  Culture may in fact be one of the key reasons traditional retailers have generally lagged behind online only competitors.  There is almost always internal conflict between the ecommerce division and the rest of a retail company.   Should there be separate buying organizations?  Which merchandise should be online?  Should promotions be the same online as in the stores?  You get the picture and there is no simple solution to these questions.  

Perhaps this is why online only entities have a leg up.  Zappos provides some context, with CEO Tony Hsieh having no retail experience at all.  Instead he was a venture capitalist with a desire to dramatically improve the customer service between consumer and retailer.  This out of the box mentality is likely to jump to the forefront as traditional retailers observe this transaction and contemplate growth in a slower growth world. 

The next step is to identify unique online players who “get it” and may ultimately “get bought”.  We’ve mentioned Gilt Groupe a few times and whether an IPO is imminent or an outright sale, this is another great example of an old model (off-price), with a new twist (limited time sales, online only).  The private companies with prominent brands but little presence on the Street cannot be ignored.

Look for more on this topic as we collaborate with Rebecca Runkle to offer her perspective in addition to attempting to identify winners and losers, buyers and sellers, and how the landscape is changing.


Eric Levine



We changed our positive tune one day too early.  Lower guidance and SBG problems were our concerns and they came to fruition.  So why is the stock up?

  • Patti Hart – She did a fantastic job on the call outlining her process.  Given IGT’s reputation for being fat, lethargic, and inefficient, Hart said all the right things to comfort long-term investors.
  • Short interest – There were many more shorts in the stock than we thought.
  • New markets – Even though the stock was on a tear the last few weeks, there were more investors afraid of the quarter than we thought.  Absent those fears, the stock would’ve been up even more.  Removing the potential negative catalyst allows investors to focus on the new markets.

Ms. Hart probably bought the company a few more quarters.  However, we remain concerned with the SBG issues including the bugs, the lack of functionality, and the poor reception from casinos.


IGT 3Q09 Earnings call


Game ops:

Earned $52/unit per day, which has been consistent over the last few quarters

Install base was driven by international unit growth, but NA had lower unit count

  • Expect that as the economy recovers install base will resume growth

Gross margins benefited from reduced jackpot expenses, due to higher rates on agencies vs prime

Domestic Product Sales:

Revenues comparisons were difficult

Replacement units were up 500 sequentially, new and expansion were 4,700

Anticipate new unit shipments will decrease over the next few quarters, booked forward 1,700 units that they originally expected to be recognized in their 4th quarter

Deferred revenue increased to $50MM

Sales of AVP machines were 80% of NA sales

International Product Sales:

Markets continue to fell effects of the economic slowdown

About ½ of the units shipments were to UK & Japan

Deferred revenue increased by 10MM to $23MM

Product margins were down due to lower mix Japan units; expect 50% margins going forward

Other Expenses:

So far expense controls have resulted in 100MM of annual run rate savings ($60MM of material savings and 440 less employees in manufacturing, SG&A reductions as well)

Costs associated with PGIC and inflation will offset some cost savings

Hard to get better margins with low unit shipments

SG&A low 100, R&D in the 50MM range going forward. 

Q4 will benefit from full cost cut benefits


No meaningful decrease in delinquencies from customers

Expect future tax rate to be 39-40%, annual tax rate for ‘09 to be 38-39%

Balance sheet/Cash flow statement:

Capex is trending around 50MM per quarter

Anticipate drawing the line to take out the convert which will get put to them

Quarterly commentary:

  • Those operators that can are replacing more units at a measured passed
  • Shipped 920 MLD units
  • $52/win per day looks like a stabilized play level
  • Reached agreements to place 450 wheel of fortune and mega jackpot products above what’s already on the floor – not sure when those will be placed (next few q’s?)

Strategic priorities:

  • Focusing on what they do well – content in the video slot segment
    • Restructuring the development effort, which will help them drive accountability
    • Consumer research group to feed the R&D process
    • Eliminations of layers
    • Other changes will take time
      • Streamlining of international processes to improve time to market
      • Focusing on two keys efforts
        • Can do a better job of processing information of testing products, compensation metrics, to investment and capital allocation decisions
        • Hired new COO to aggregate and process data to maximize return on capital

2009 Outlook:

Despite improvements in certain metrics in 3Q09, replacements are still very weak

Recording 3 cents of earnings in the 3Q09 that were originally slated for 4Q09

Reduced guidance range to 75 to 80 cents


Will the 4Q09 quarter install base increase?

  • Stable… is what Pat guided to

Timing of new markets

  • In the US (OH & IL) too early to tell because the bills are WIP
  • Italy – complexity in getting product to market, think that their product is well suited though
    • 300k AWP now, 14% can be converted to VLTs (so that’s the addressable market)

Cost reduction programs

  • No sacred cows       

By G2E, should see some more clarity about product direction and see what will be on the front burner for IGT going forward

R&D: thinks about it as an investment – expect it to stay relatively flat going forward. Expect to see more efficiency, more delivery for same dollars

  • Will not think about allocation by product/ systems, but more along improving patron experience

What are breakage fees – debt breakage fees – to break the draw times (draws are typically 60-90 days)?

MLD – 920 units were MLD, also what’s driving ASP’s (3-4k premium to normal games)

On the design/R&D side, what are the changes?

  • Everyone was arranged in modules that have impeded speed to market, so now they have stand alone units that are going to be measured on financial contribution for their products vs. being disconnected before

Japan, any Reg 5 amendment coming?  – not seeing any clarity to Reg 5 adjustments.  Expects the Japanese market to stay unpredictable (hit driven). Shipped 1200 units

Firekeeper’s shipment was pulled forward (got 1,700 out of 2,500 units), thought they would have to defer it because they are also providing the system.

  • They weren’t involved in the financing

Replacement sales commentary:

  • Mostly coming from outside of LV & AC

Daily Trading Ranges

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MCD - A Case of Bad Timing

MCD’s June same-store sales slowed rather significantly on a sequential basis across the board.  MCD stated that a calendar shift/trading day adjustment varied by area of the world, ranging from -2.0% to 0.2% in June 2009.  Even adding back 2% to the reported numbers, 2-year average trends slowed in each geographic segment.  The comparisons get substantially more difficult in July as the company is lapping a 6.7% same-store sales number in the U.S. and 8% on a consolidated basis.  That being said, CEO Jim Skinner stated, “As we begin the third quarter, we expect to report July consolidated comparable sales similar to or better than June.”

U.S. comparable sales increased 1.8% in June following a 2.8% number in May.  And, it looks like these weaker than expected trends are likely to continue in July. 

As I said earlier this week, I continue to believe that McDonald’s current product strategy, including the roll out of its premium Angus burger and McCafe specialty coffee platform, is not focused on its core market – family and value-minded customers.  As we are seeing with other QSR operators that are focused on more premium menu offerings, particularly CKR, now is not the right time to try to drive traffic with more expensive menu items.  Rolling out a $4 sandwich and $3.50 cup of coffee into the teeth of a 10% unemployment rate could be a case of unfortunate timing.

MCD - A Case of Bad Timing - MCD June US SSS

MCD - A Case of Bad Timing - MCD June Europe SSS

MCD - A Case of Bad Timing - MCD APMEA June SSS

MCD - A Case of Bad Timing - MCD Global June SSS



23 JULY 2009



“All the busy little creatures chasing out their destinies… living in their pools they soon forget about the sea...”

– Neil Peart

Ok, Keith quotes Nietzsche, and McGough quotes lyrics from Canada’s most successful progressive rock trio.  Poke fun if you’d like, but no one can ever claim that we at Research Edge are not open to inspiration from all angles!

But this quote hit home with me yesterday as I drove down I-95 from Boston to Connecticut. I had the pleasure earlier in the day of having lunch with one of the future leaders of Wall Street.  Half of our conversation revolved around the obscenity surrounding how so many people are trying to time little ripples of info related to 3Q and 4Q EPS instead of focusing on 30-foot waves forming on the horizon. Ever sit on a surfboard and get caught up watching the beach instead of the horizon? I don’t suggest you try. It hurts…

But that is what we’re seeing now on the Street. There’s no shortage of stats that should make us step back and question where the long term opportunity really is. Consider the following…

US retail sales growth came in at -8.99% last month, and the ‘chatter’ was all about how this was a positive development because it was better than expectations. But what about the 15% growth number we saw in China?

  1. 860k autos were sold in the US in June per Motor Intelligence. But that compares to 1,142k in China in the same period.
  2. 510,563 total new accounts opened throughout the second quarter at Etrade, TD Ameritrade and Charles Schwab combined. Yes, that’s a big number. But what about the 484,799 new individual equity accounts opened in China LAST WEEK?

I won’t beat this China horse any more. Our Macro team just published a China Black Book that more than covers everything any investor needs to know on the topic. (If you’d like a copy, feel free to email .)

But what about investors that are staying closer to home (either by choice or by mandate)? Even within the US, I feel like people are hyper focused on the tidal pools. The best example is CIT.

I can’t even count the number of calls I got last week on this whole CIT situation. “Hey McGough… what name can I play on this theme?”  The answer? No one. To try and pick one company that will get hurt is a useless exercise. Spending effort on that is completely missing the potentially HUGE call, which is picking the second and third derivative of this situation. This all boils down to private equity as a three-legged bar stool. What do I mean?

  1. Let’s look at all the PE deals done over 5 years at peak multiples and peak (single digit) margins. Now layer on a weaker consumer and 100% debt to total capital. Cash flow ain’t looking too good. These smaller and/or private companies are the ones that will be most impacted by tightening credit/factoring.
  2. Now let’s look at the portfolio of companies for each private equity firm – it’s not that tough to do. All it takes is for one domino in the portfolio to topple, and then others could follow as they trip covenants, and act irrationally as they try to keep their heads above water. (2nd derivative).
  3. Then this plays into the third derivative (mathematically speaking, there’s probably a better way to frame this up – but you get the drift). This includes the impact of the vendors, retailers, sourcing companies, and other trade partners that will be impacted as dominos fall. You can go to your little one-on-one meeting at a conference and have a CEO tell you that all is hunky dory. But I can all but guarantee you that 90%+ of them are not spending a whole lot of time on whether this key critical uncertainty even exists – nevermind how to come out on top.

This is when investors get paid to not only think a step ahead of the competition, but to think a step ahead of the people running the companies.



Some Notable Call Outs

- Sherwin-Williams’ CEO reminded us that the excess in the home and commercial building market is still being unwound and is showing a muted path towards recovery. On the company’s 2Q conference call, CEO Chris Connor stated, “We believe the significant challenges that we face in the first half of 2009 will certainly continue into the second half. Based on industry estimates for full-year 2009, the past three years have erased a decade of volume growth in the US architectural market. Although we do not believe industry volumes are sustainable at this low level over the long term, any significant impetus for recovery has not yet materialized, and we believe that the recovery itself will be slow once it begins.”

- Add Charlotte Russe to the list of retailers taking advantage of advantageous real estate deals. As the company looks to downsize its store prototype to 5,500 square feet and also accelerate the rollout of an outlet strategy, it is seeing favorable pricing in both “A” malls and premium outlet centers. The company is benefitting on two fronts including rent reductions as well as an upgrade in location quality. As the economy recovers, we expect that a trade up to higher quality real estate will likely lead to higher sales productivity.

- When pressed on VFC’s 2Q conference call to highlight examples that helped management come to the conclusion that the environment is “stabilizing”, the company highlighted positive comps at Van’s and a “flattening” in the trend line at the company’s own stores. For a company that is so diversified on both a brand and geographic level, it’s a bit surprising to hear that Van’s is being used as a barometer. Additionally, when asked about fall bookings, management highlighted that Nautica is running at a similar run rate to current trends and that they didn’t have the fall bookings for North Face available off the top of their heads. The comment, or lack of, on North Face is particularly surprising in light of the brand’s size (#2 brand for the entire company) and the fact the brand’s reported momentum continues to slow.

- As Fall collections begin to trickle in to luxury boutiques, we’re hearing that initial pricing is below last year. There has been some indication that some collections at Gucci and Prada are priced 25-33% below Fall ’08 initial selling prices. While this is certainly noteworthy, and counter to the measurable price inflation we have seen in the luxury sector over the past several years it remains to be seen if the price adjustments will stimulate demand. Given the high level of discounting over the past year in the 50-90% off range, the customer has certainly become accustomed to shopping for a deal.

- In another sign that retailers are ordering much closer to need, Skechers highlighted that July may become its biggest shipping month of the year. Historically for the past 10 years, June has been the biggest month as retailers accepted deliveries for the key back to school selling season. This coincides with similar commentary from Wolverine last week. Customer’s ordering closer to need is a bit of a catch-22 for the wholesale community. On one hand, it should theoretically increase turns across the supply chain and reduce inventory levels. On the other hand, it is also a sign that demand remains volatile and retailers are still operating with low visibility. In the intermediate term, lower visibility results in wholesalers having to carry back stock to meet at-once demand that may arise at any time.



- Amazon has acquired the ecommerce footwear company Zappos – confirmed in an open letter from Zappos CEO Tony Hsieh. The deal is officially for $807 million in Amazon stock, plus about $40 million in cash and restricted stock, based on the July 21st closing price. <mashable.com>

- Neiman Marcus upgraded to stable by Moody's - Neiman Marcus Inc. got a thumbs-up from Moody’s Investors Service, which switched its rating outlook on the firm to “stable” from “negative” after the company extended a $600 million credit agreement last week.  The debt watchdog also upgraded the retailer’s speculative grade liquidity rating to “SGL-2” from “SGL-3.” Neiman’s took advantage of some loosening in the credit markets and renegotiated its asset-based revolving credit agreement, pushing its maturity date back to January 2013 from October 2010. <wwd.com/footwear-news>

- Avon Products will restructure and cut jobs - Avon Products Inc. said Wednesday it will restructure and eliminate about 1,200 jobs in the next three to four years, putting itself on track for $200 million in annual savings. Details of the realignment, first outlined in February, include the shutdown of manufacturing facilities in Springdale, Ohio, and Neufahrn, Germany; the streamlining of a facility in Naro-Forminsk, Russia, and more centralized structures for Latin America and the division covering Western Europe, the Middle East and North Africa. <wwd.com/footwear-news>

- CIT Clients Advised to Seek Alternatives - For now, CIT has reopened the credit spigot and was back providing advances to clients, according to sources. But the commercial lender said in a regulatory filing Tuesday that a Chapter 11 bankruptcy filing remained a possibility if some bondholders declined to tender their holdings by Aug. 17 and agree to take less than face value for the $1 billion in debt coming due next month.  “It’s a difficult position for our clients to be in,” said Victor Wahba, a partner at accounting firm Weiser LLP. <wwd.com/retail-news>

- Top 10 Retail Industry Executives Pay Compensation - WWD’s annual ranking of key retail industry executives by compensation reflects Wal-Mart’s dominance over the past year. Four officers of the world’s largest retailer made the top 10, with a combined $61.9 million in compensation. The top ten are: 1) H. Lee Scott Jr. former President and CEO of Wal-Mart with $30.2, 2) Michale S. Jeffries Chairman and CEO of Abercrombie & Fitch with $15.9, 3) Paul Marciano Vice Chairman and CEO of Guess with $15.2, 4) Julian R. Geiger CEO of Aeropostale with $14.2, 5) John J. Donahoe President and CEO of Ebay with $13.2, 6) Michael T. Duke Vice Chariman, President, and CEO of Wal-Mart with $12.2, 7) Myron E. Ullman Chairman and CEO of JC Penny with $10, 8) Eduardo Castro-Wright Vice Chairman of Wal-Mart with $9.99, 9) Lew Frankfort CEO of Coach with $9.65, and 10) Thomas M. Schoewe Executive VP and CFO of Wal-Mart $9.48. <wwd.com/retail-news>

- PSUN preannounces lower comps - Pacific Sunwear of California, Inc. updated earnings expectations for the second quarter of fiscal 2009, announcing same-store sales for the second quarter are projected to decrease by approximately 24% versus original expectations of negative 17% to 20%. Additionally, the company expects a lower effective income tax rate and higher store asset impairment charges for the quarter <sportsonesource.com>

- COLM opening new store in Frankfurt, Germany - Columbia Sportswear Company has announced the upcoming opening of a new Columbia-branded store to be located in the heart of Frankfurt's famous Zeil Strasse, in the recently opened My Zeil shopping centre. The new store, which will occupy 325 square meters, will present the company's Columbia brand outdoor apparel, equipment and footwear and Sorel brand footwear to millions of outdoor enthusiasts who live in Germany <sportsonesource.com>

- Wal-Mart agrees to pay another class action lawsuit - Wal-Mart Stores Inc. has agreed to pay up to $35 million to settle a class-action lawsuit brought on behalf of 88,000 workers at Washington state stores who were forced to skip meal and rest breaks, or work off the clock. <capitaliq.com>

- U.K. Retail Sales Growth Beats Estimates Fourfold as Confidence Returns - U.K. retail sales jumped four times as much as economists forecast in June as signs of improvement in the economy and discounts encouraged shoppers to buy more food and clothing. Long period of sunny weather lifted purchases of clothing and footwear and sales at department stores, data from the Office for National Statistics showed Thursday. The volume of retail sales rose 1.2% from the previous month and was up 2.9% from a year earlier in June, the largest annual gain since December last year. May's sales were downwardly revised to show a 0.9% gain on the month and a 2.0% fall on the year. <online.wsj.com>  <bloomberg.com/news>

- UK's clothing manufacturing industry could see shifts of ownership - The current global financial crisis has impacted the UK's clothing manufacturing industry, with one-in-five companies could see shifts of ownership, according to a new research from financial analysts Plimsoll. There were numerous "cash-rich" competitors circling, meaning the market could be set for a lengthy period of consolidation, said the research. "In the current climate, there are simply too many companies chasing too little market," said study author David Pattison. "With many directors eyeing the exit doors and highly leveraged buyouts consigned to history for the time being, it really is a buyers' market out there for cash rich companies." The research has also identified 166 companies with sizable cash reserves which, due to low interest rates, was unable to generate income.  "These companies are now in the position to buy up large chunks of market share at rock bottom prices and make that money work for them. They must be like kids in a sweet shop at the moment – all those distressed competitors available at a fraction of their true value," Pattison said. <fashionnetasia.com>

- Australian Wool Innovation will invest more in marketing and less in research - Australian Wool Innovation (AWI) is planning to invest more in marketing and cutting back on farm research in response to the industry concerns. Wool growers are voting in the WoolPoll over the next few months, which will determine how much money from each kilogram of wool sold goes to AWI, and chief executive Brenda McGahan said those in the industry had called for more help with promotional aspects. "The feedback we've had from growers is they say we can grow the wool, but we need help in marketing and need help to take this product to the markets overseas," McGahan said. <fashionnetasia.com>

- Minneapolis sees highest retail vacancy - Twin Cities retail property owners continue to feel the brunt of the economic recession, with store closings and canceled expansion plans causing a glut of empty space not seen in at least 14 years, a new report says. The report, released this week by Bloomington-based brokerage NorthMarq, puts the vacancy rate for all types of retail space in the Twin Cities at 9% as of June 30, and 10.3%including subleased space put on the market. There's no immediate sign that the climb in vacancies that began in 2006 will stop anytime soon, NorthMarq said. The rate of store closings might slow during the second half of the year, but more are expected, said Stefanie Meyer, a NorthMarq senior vice president who specializes in retail. The downturn has affected every type of retail center, from large regional shopping malls to smaller neighborhood and community strip centers, the report said. Regional and lifestyle malls have found themselves especially vulnerable to cutbacks by struggling fashion merchants such as Ann Taylor, Chico's, Gap and Zales. <startribune.com>

- Americans love affair with the mall isn't dead after all - Consumers are spending less as they worry about their jobs and retirement savings, but they're still hanging out at the mall, according to a new report from ShopperTrak RCT Corp., a Chicago-based firm that tracks retail foot traffic. After falling 4% in January, visits to shopping malls have rebounded and are now on par with "pre-recession" traffic levels, the firm said. May and June both showed foot traffic unchanged from the periods a year earlier, before the recession deepened.  "Store visits are declining, but people still want to use that element of going to the mall as a social release," said Bill Martin, co-founder of ShopperTrak. The figures represent trips to the nation's roughly 1,300 enclosed malls. Overall retail traffic fell 13.4% in May and dropped 12.2% in June from a year earlier, Martin said. The report signals that Americans are still attached to their local malls, even if they aren't walking away with many shopping bags. Malls had lost some ground in 2004 through 2006 as big-box stores and power centers lured shoppers, offering discount prices and a chance to get in and out quickly. But discounts are now common at the department stores and specialty chain shops the populate the mall. Most likely, consumers are looking at the mall as a source of entertainment -- where they can go to the movie, dine out and window shop -- rather than just shop, Martin said. <chicagotribune.com/business>

- Fotunoff founders have purchased intellectual property of the company - The families who owned and operated Fortunoff before its sale to private equity firms have purchased all the intellectual property of the now-bankrupt company and are researching ways to relaunch the brand, family members said Tuesday. The Fortunoff and Mayrock families, who built the iconic regional retailer of gifts, housewares, furniture and jewelry over four generations, bought the property for about $1.8 million. The purchase - approved July 6 in U.S. Bankruptcy Court in Manhattan - included the brand name, related trademarks, customer lists, domain names and copyrighted material. The company has been liquidating its assets since February, when it filed for bankruptcy and its parent company, NRDC Equity Partners Llc, was unable to find buyers to continue running the chain. David Fortunoff, who ran Fortunoff.com as well as the company's bridal registry, credit card and database marketing, noted that the Fortunoff name still resonates with consumers and that "tremendous opportunity" in the outdoor furniture, jewelry and bridal niches still exists. <newsday.com/business>

- Charming Shoppes keeps Figis.com, but gives ShoeTrader.com the boot - Charming Shoppes will stay in the food and gifts business after deciding to keep its Figi’s e-commerce site and catalog, but will exit online shoe retailing by closing ShoeTrader.com, the company says. <internetretailer.com>

- Coldwater Creek is the most consistent retailer in June - ColdwaterCreek.com led seven major retailers that achieved an "excellent" web site consistency rating in June, according to Gomez Inc. The top 48 retail web sites measured last month had an average site availability rate of 95.01%. <internetretailer.com>

- Sales at Overstock.com decline in Q2 - But Overstock.com improved its bottom line in the second quarter. While revenue declined 6.7%, Overstock posted Q2 net income of $389,000 vs. a net loss of $7.4 million in the prior year. <internetretailer.com>

- Footwear brand MBT announced addition of new North American Managing Director - Comfort footwear brand MBT announced Monday the addition of Paul Grimble as the North American managing director. Grimble, formerly of Ecco and Clark’s, will head up the U.S. and Canadian businesses for the Hailey, Idaho-based brand. CEO Ken Pucker had been in charge of this aspect of the business, but will now relinquish these responsibilities to Grimble. “We are pleased to have someone with such solid retail relationships and depth of experience,” said Pucker in a statement. “Paul’s brand-building skills and track record developing functional, premium brands are very well suited to MBT.” <wwd.com/footwear-news>

- Skechers Shape Up Shoes selling well in UK Fitness Footwear retail - For the web's widest choice of sports and outdoor shoes, Fitness Footwear was one of the first UK retailers to stock Skechers Shape Ups while offering a wider range than anybody else online.  Sales started from the moment Fitness Footwear put them on site and they haven't stopped.  Sales of Skechers Shape Ups started slowly at first, but after regular appearances in OK!, Cosmopolitan, Women's Fitness and many other publications, Shape Ups have become the fitness shoe to be seen in this summer by blending fitness and fashion into a desirable product.  To build trust in their new range of Shape Ups trainers, Skechers were prompt to commission an independent trial of their latest product. The Skechers Shape Ups clinical case study, conducted by Dr Steven Gautreau D.C. comprised of ten women who were selected to wear Shape Ups for a trial of 6 weeks during which their body weight, body composition, glutei strength and low back endurance was measured.  The end results were remarkable with an average weight loss of 3.25 pounds, a 1.125% reduction in body composition, 41% increase in glutei strength and a significant increase in lower back endurance. All women taking part in the tests commented on the effects of wearing Skechers Shape Ups as part of their daily routine and consciously enjoyed the benefits, noting the physical improvements, particularly in their posture.   <uk.sys-con.com>

- Somebody Wants to Destroy American Apparel for Supporting Gay Marriage - Vandals attacked a window display that featured pro-LGBT T-shirts at the Silver Spring American Apparel store on Monday morning, The Sexist reports, shattering a window in the process. The Georgetown location of American Apparel also received a telephone threat later that day about their similar window display. The T-shirts in the window bore the logo of the company's "Legalize Gay" campaign, which is designed to raise awareness about opposition to California's Proposition 8. The Silver Spring store has since removed its front window display. American Apparel has issued a statement in response to the attack and threats. "We don't find this kind of thing funny and we definitely don't find it intimidating," reads the statement in part. The company also offered to send "Legalize Gay" T-shirts to any group in Washington D.C. that is fighting for gay rights.  <dcist.com>


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): XLY

07/22/2009 01:59 PM


As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. KM




  • Larry Sablosky, Director, sold 13,974shs ($112k) after converting Class B shares representing entire common holdings.
  • David Klapper, Director, sold 63,114shs ($508k) after converting Class B shares representing entire common holdings.
  • Alan Cohen, Chairman of the Board, 200,000shs ($1.6mm) after converting Class B shares representing entire common holdings.









Did anyone else notice the 50% off promotion Starwood has running on their website?


Starwood reported 2Q09 Adjusted EPS of $0.22 and EBITDA of 200MM, beating the quarter by 5 cents on EPS and EBITDA by 4MM (vs. consensus) and 10MM (5%) on our numbers.  The theme of weak top line saved by deep cost cuts continues.


Of course, next quarter’s guidance cut was deep:

  • EBITDA guidance of $165MM to $175MM was 11% below our number and 20% below the street
  • EPS guidance of $0.06 to $0.10 - even if we take the top end, it’s still 35% below our number and 57% below street estimates
  • As we wrote about in the preview, FX is less bad so next quarter’s RevPAR guidance is better by 1% on a constant dollar basis but looks 4% better sequentially (only down 20-22% vs this quarter’s guidance of being down 24-26%)

2Q09 Review:

  • RevPAR was disappointing, especially given the weakening of the dollar which should have helped the worldwide (WW) stats
    • RevPAR on owned hotels came in 2.4% below the low end of guidance
    • WW system-wide RevPAR came declined 27.7% vs guidance of down 24-26%
    • Starwood experienced higher attrition in the system than we expected, and only added 200 net rooms to the system this quarter
      • HOT added 2100 less room than we estimated, but still had healthy y-o-y growth of 4.9% in management and franchised rooms (12.2k rooms)
      • Owned, leased and consolidated JV expenses declined 2.5% more than we expected, producing an 11MM benefit to expenses, offsetting the disappointing revenue results
      • Overall operating cash flow came in 8MM stronger than we expected due to better cost controls on the owned/leased/JV and VOI side
      • Fee income of $187MM was $7MM better than our number
        • The beat was solely attributed to higher “other management & franchise fee revenue”
        • The amortization gain was $20MM
        • Bliss and “other” was also a little better
        • Probably higher affinity fees as well
        • VOI sales were 8MM below our estimate, however, expenses were also 8MM lower, hence net came spot in line

 Full year guidance was in line with our numbers, which were below the street:

  • SS Company Operated WW RevPAR -20% (vs -18% prior guidance) and RevPAR on branded SS owned hotels WW down 25% (vs - 21% previously)
  • $750MM of EBITDA vs. our estimate of $746MM and street at $791MM
  • EPS guidance was $0.65 spot in line with our number which was 18% below the street
  • Management and franchise revenues projected to decline 15% vs. previous guidance of -10%
  • VOI and residential down $10MM more than original guidance, however, adjusted for the note sale FCF from timeshare was raised to $150MM from $25MM
  • SG&A projected to come in $10MM lower than prior guidance of $70MM, we were actually modeling SG&A declines of $100MM
  • Guidance on tax rate, D&A, and capex was unchanged

Other tidbits:

  • The extension of the AMEX co-branded card is interesting.  As we wrote about in our Marriott note on 7/21/2009, “LOOKING UNDER THE HOOD OF THE MARRIOTT MARGIN CAR”, affinity fees flow right to the bottom line. We’re curious where Starwood includes these fees.  The $250MM in cash received from American Express seems unusual.  Is this an advance?  If so will there be some negative amortization to offset affinity fees (aka the gain amortization on mgmt contracts that HOT like to recognize as fee income)?
  • What are the “special items”
    • Like Marriott, HOT took an impairment on its retained interest in one of its timeshare securitization deals.  We’d like a little more information.  As we wrote about, these may not be one time.  We also would like to know whether HOT retained any equity interests in past deals.  MAR has historically had the highest quality deals so they did not – but we’d like to confirm this for HOT as well.
    • How will the step up in Italian tax rates effect HOT’s future profit margins, we assume that this “tax incentive program” wasn’t simply a gift from the government. 

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