Goldman upgrades but trouble brews in the Caribbean



Year-to-date, NCLH has fallen 15%, compared with CCL’s -7% and RCL’s +8%.   Why the underperformance despite two new ships serving the Caribbean market, the highest projected yield growth in the industry for 2014, highest % of buy ratings in the industry at 86% (including GS’s buy upgrade last night) with no sell ratings, and a bullish CEO?  One can blame the Genting overhang of potential stock sales, but that would be missing the big picture.  Caribbean discounting concerns are real and it’s not abating for NCLH, at least in the short-term.


Norweigan reports Q1 earnings next Monday after the bell.  As we pointed out in our last cruise survey, “CRUISE PRICING SURVEY: DICEY Q2” (04/04/14), Norwegian’s Q2 guidance could miss Street expectations.  We currently forecast 3% net yield growth at $0.52 EPS for Q2.  Q1 should be ok (HE: 4% net yield, $0.24 EPS) since results are boosted by the introduction of Getaway in February.  However, sell-side estimates go as high as 6.5% net yield growth for Q2.  NCLH’s 4% FY net yield growth guidance seems aggressive.  If FY 2014 EPS guidance is to be met, we think it would have to be on the cost side; otherwise, expect a guidance cut.


Our latest pricing survey, conducted on April 21st/22nd, confirms our bearish stance on NCLH (we’ll have more survey commentary in a separate note).  Caribbean pricing trends worsened for the Norwegian brand in late April bringing overall pricing lower, as seen below.  The Caribbean accounts for 56% of NCLH’s total capacity in 2014, up 6% points over the previous year.




We also think it’s important to clarify something mentioned often by the frustrated bulls - steady new ship premiums.  For the most part, we agree but a closer look shows it is because of price discounting across all ships.  We believe it is most insightful to compare Getaway and Breakaway with its peers in their respective markets –Miami and New York City.  As the charts below show, the new ship premiums have been relatively consistent with lower and lower prices, although the recent Breakaway discount in Q2 is pretty ugly.  










Retail Callouts (4/22): NKE, WMT, SKX

Takeaway: ICSC - no lift from Easter. NKE talks about sourcing. WMT UK testing grocery lockers. SKX and Meb serve us a helping of crow.




  • SKX - Earnings Call: Tuesday 4/22, 4:30pm



  • UA - Earnings Call: Thursday 4/24, 8:30am
  • CAB - Earnings Call: Thursday 4/24, 11:00am
  • DECK - Earnings Call: Thursday 4/24, 4:30pm
  • HBI - Earnings Call: Thursday 4/24, 4:30pm
  • AMZN - Earnings Call: Thursday 4/24, 5:00pm



  • VFC- Earnings Call: Friday 4/25, 8:30am




ICSC - Chain Store Sales Index


No lift from the Easter shift with numbers flat YY. If we look at the trailing 4 week average, numbers were down 40bps against easy compares. With no excuses left in the chamber, it's shaping up to be a tough earnings season for a whole host of retailers.


Retail Callouts (4/22): NKE, WMT, SKX - chart1 4 22




NKE - Inside Nike's Struggle to Balance Cost and Worker Safety in Bangladesh



  • "Over the years, Nike's use of overseas manufacturers has periodically sullied its image, and its campaign to eliminate such problems hasn't been easy. It has plowed money into helping factories and sacrificed sales at key moments when standards were breached. It has largely eliminated problems such as factory-worker deaths and the use of certain hazardous chemicals."
  • Nike ended its relationship with Lyric after its pending production orders were filled last July. It decided it would stick with four other factories in modern buildings in Bangladesh's export-processing zones…'Did we pass up on margin because of that?' Ms. Jones says. 'Absolutely.'"


Retail Callouts (4/22): NKE, WMT, SKX - chart3 4 22


Takeaway: Today is the 1yr anniversary of the Rana Plaza collapse, so much of today's news flow was focused on sourcing. NKE is in an interesting spot - it more than just about every other company has taken serious heat over its sourcing practices. The company used its WSJ soap box to highlight its new ethical approach to sourcing - placing standards ahead of margins. We're all for human rights, but we must put on our analyst hats and realize that input costs are increasing as a result. A trend that we expect will continue.


WMT - Walmart’s English experiment



  • "It is the first Asda supermarket to allow customers to pick up their shopping from temperature-controlled lockers. After submitting their order online, shoppers collect their goods from the bright-turquoise storage units, which are unlocked when they enter their order number or scan a 'QR' code sent out after payment. Inside the lockers, their goods are divided into three zones: chilled on top, frozen on the bottom and ambient in the middle."
  • "Walmart is watching the Pudsey 'click and collect' experiment to see whether it could be a useful innovation for its vast grocery operations in the US, which are today overwhelmingly reliant on customers driving out to stores and picking goods off the shelves themselves."


Takeaway: We give WMT credit - this sounds like it could work. Click and collect is a better alternative to delivery from an expense stand point, and it makes sense in an urban setting where lockers could be located in central, high traffic, locations.  Exacerbates the traffic issue by locating lockers offsite, but a good defense against pure play e-commerce competition.


SKX - Skechers Rises After Keflezighi Wins Boston Marathon



  • "Skechers USA Inc. gained traction in New York trading today after Meb Keflezighi, the American runner who endorses its shoes, triumphed at the Boston Marathon."
  • "Skechers signed Keflezighi to an endorsement deal in 2011, about two years after he’d won the New York Marathon. The company, which was founded in 1992 and known mostly for its skateboard shoes and boots, introduced the GOrun line later in 2011, with Keflezighi as its main pitchman. Skechers and Keflezighi extended their agreement in November. Higgins declined to comment on the financial details of the deal."


Retail Callouts (4/22): NKE, WMT, SKX - chart2 4 22


Takeaway: Great win for SKX yesterday in Boston. Meb served us a big helping of crow - we were skeptical that one could even finish a marathon in a pair of Skechers, let alone win.







  • "NIKE, Inc. today announced that Michelle A. Peluso has been appointed to the Company’s Board of Directors. Peluso, 42, is Chief Executive Officer of Gilt…"
  • "Peluso served on the Gilt board of directors until her appointment as Chief Executive Officer last year. Prior to joining Gilt, she served as Global Consumer Chief Marketing and Internet Officer of Citigroup Inc. from 2009 to 2013; and from 2002 to 2009, she held senior management positions at LP, being appointed Chief Operating Officer in 2003, and President and Chief Executive Officer in 2004."


Fears over ‘feelgood factor’ as Easter shoppers stay at home



  • "The average number of shoppers on Good Friday measured by what is known in the industry as 'footfall' by the Springboard monitoring company, was down 7.6 per cent on Good Friday and 8.7 per cent on Saturday."
  • "A strong pick-up yesterday was not expected to offset the poor performance of the first two days, Springboard said. "


BEBE - bebe stores, inc. Reports Preliminary Third Quarter Fiscal Year 2014 Net Sales and Loss per Share



  • "bebe stores, inc. today announced that based on its preliminary financial results, the Company is updating its net loss per share guidance for the fiscal third quarter ended April 5, 2014. The Company expects to report actual fiscal third quarter 2014 results on May 8, 2014."
  • "Comparable store sales for the quarter ended April 5, 2014 decreased approximately 5.7%. Net sales were approximately $93 million, a decrease of 17.2% from $113 million reported for the third quarter a year ago. The sales decrease was due partially to one less retail week in January in the current fiscal year coupled with the closure of 19 unproductive stores since the prior year third fiscal quarter."
  • "Merchandise margins for the third quarter increased by approximately 50 basis points as compared to fiscal third quarter last year but were below previous expectations due to the increased level of promotions in response to the challenging retail environment. The gross margin rate is expected to be below that of the prior year due to deleveraging of sales. As a result of these factors, net loss per share for the quarter is now expected to be in the $0.29 to $0.32 range. This assumes estimated non-cash impairment charges for bebe, 2b and outlet stores of up to $0.04 per share."


Alec Richards


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Average Daily Table Revs (ADTR) jumped this past week to HK$1,065, up 38% YoY.  Our full month GGR projection including slots is for YoY growth of 7-11%.  Remember, our initial April projection was 12-16% growth and we suspect that low hold is the primary driver of the underperformance. 


We continue to believe that growth will reaccelerate in May, potentially up 20% YoY.  With the stocks down 20-25% in less than 2 months, the May performance could be a big catalyst.  For now, this past week’s strong data should alleviate some concerns of a massive VIP slowdown.


Market shares continued to regress toward the mean.  Despite a 110bp drop from the mtd as of last week, LVS is still tracking above recent trend.  MPEL came down from the clouds this past week but still is tracking well above recent trend.  Galaxy is the only laggard from recent trend although share looks much better than it did last week.






The federales are unlikely to approve a tax-free spin






We believe a tax-free spinoff to shareholders of a REIT by Pinnacle Entertainment is a low probability event.  Meanwhile, back at the ranch, the fundamentals aren’t good and new competition risk remains high.






Based on the Pinnacle Entertainment Form 13D filing by Orange Capital (“Orange”) and PNK stock price up almost 6% yesterday, we wanted to revisit the comments we made regarding PNK and a potential PNK REIT spin four weeks ago during our Goodwin Proctor REIT Thought Leader Conference Call regarding Boyd Gaming’s potential conversion.



First and foremost, similar to Orange, we believe a REIT spin is a worthy endeavor and strategy for lowering the cost of capital for a large portion of the current PNK enterprise.  However, we also believe a potential tax-free REIT spin is a low probability event for Pinnacle Entertainment.   As we stated during our conference call, PNK may be able to affect a less attractive taxable spin-off of the REIT or potentially sell real estate to an existing REIT.



Hurdles to a tax-free spin: 


  • Most importantly, Orange assumes the receipt of a tax-free spin Private Letter Ruling (PLR) by the Internal Revenue Service.  We note, Lamar Outdoor announced in August 2012, it would pursue a REIT conversion and as of today has not yet received an Internal Revenue Service PLR.
  • Orange also assumes House Ways & Means Committee Chairman Dave Camp’s February 25, 2014 proposed REIT rule modifications will not be enacted. 
    • The Camp Proposals would prevent these transactions from being tax-free to the distributing corporation and its shareholders by providing that a REIT cannot be a distributing corporation or a controlled corporation in a Section 355 distribution.
    • The Camp Proposals also provide that any distributing or controlled corporation involved in a Section 355 spinoff must wait 10 years before making a REIT election.
    • The Camp Proposals would apply to all spinoffs occurring after February 26, 2014 unless a binding commitment to complete the spinoff was in place prior to February 26, 2014
    • We believe there is bipartisan support for eliminating tax-free REIT spins.  The IRS is unlikely to provide PLR with the political momentum moving against these types of transactions.


Orange Capital’s assumptions and where we differ:


  • Orange assumes a $700m equity raise pre-spin.  That’s a big equity deal.
  • Post transaction valuation assumptions - Orange assumes:
    • Significantly higher REIT (Prop-Co) EV/EBITDA multiples of 13x to 15x versus our 10x, 12x and 14x
    • Significantly lower REIT (PropCo) G&A of $15m vs. our $31m assumption
    • OpCo EBITDA of $280 million vs. our $313 million
    • REIT EBITDA of $335 million vs. our $309 million (G&A differential)
    • Orange ignores the NOLs currently on PNK’s balance sheet - and the inherent value to shareholders.  PNK’s income will be mostly shielded from taxes for a long time even without a REIT spin.  As of December 31, 2013, PNK had $553 million of federal net operating losses, which can be carried forward 20 years and will begin to expire in 2028.  PNK also had $862 million of state net operating loss carry-forwards, predominantly in Louisiana and Missouri, that expire on various dates beginning in 2014.
    • Pro forma Orange assume a REIT leverage of 6.25x debt/EBITDA will have access to capital for acquisitions.
    • The PNK REIT could be 40% smaller than GLPI which could be a hurdle to a decent trading multiple




  • Future potential new competition in Illinois would adversely impact the revenues and EBITDA of Pinnacle’s Ameristar East Chicago property.
  • Casinos in Texas look inevitable to us which brings into question the sustainability of fixed rent payments from the PNK’s numerous and large Louisiana properties
  • Orange assumes the REIT will be competitive in bidding for new acquisitions while GLPI has sourced one small acquisition in its limited standalone life. 

There's a Large Asterisk Next to the Market's Recent Run

Takeaway: Lower-highs on lower-volume doesn't confirm a renewed bull.

If you look at the complexion of the stock market sell-offs and bounces over the last month, US Equity Volume on DOWN DAYS is +8% versus the 1-month average. Volume on UP DAYS is -5% versus the average.


Over the last 5 (up) days, volume has been -14% versus the average. Yesterday, US Equity volume was -18% vs the 1-month average.


In other words, lower-highs on lower-volume doesn’t confirm a renewed bull.


There's a Large Asterisk Next to the Market's Recent Run - Volume Total Mkt

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