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REMOVING CCL FROM BEST IDEAS

We’re taking CCL off the Best Ideas List as a Long.

 

 

Following a near 20% increase in stock price over the past 6 months, CCL’s valuation of 16x 2015 EPS looks fair.  Near-term risks include:  1) continued choppiness in Caribbean pricing for the industry and 2) increased Macro risks including consumer spending pressure and higher oil.  We remain constructive over the intermediate term as CCL yields should outperform Street expectations as the brand continues to regain lost value and brand rebuilding costs should abate.  


CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS

Q2 Caribbean pricing remains a headwind for both companies but Europe is a positive offset for RCL

 

 

OVERALL SURVEY SENTIMENT

  • RCL:  Neutral
  • NCLH:  Negative 

 

CALL TO ACTION

We are not expecting much change to RCL’s 2014 guidance but Q2 could be lower than consensus.  NCLH still has the most risk to 2014 yield guidance.  

 

RCL

  • North America
    • As Chart 1 shows, FQ2 sequential pricing jumped into positive territory thanks to a rebound in Alaska pricing (although numbers are skewed due to absence of Celebrity in the Caribbean for May/June).  In the Caribbean, sequential pricing was flat; on a YoY basis, pricing remains lower in the double digits for FQ2 and FQ3.
    • Quantum pricing for Nov/Dec remain unchanged
    • Pullmantur pricing steady

Chart 1

CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS - rcl1

  • Europe
    • Chart 2 shows strong YoY pricing for FQ2.  In Chart 3, on a sequential basis, there was a price drop in FQ2 but that is more than offset by gains in FQ3 and FQ4.
    • RC brand – pricing up high double-digits for F2Q and high single/low double digits YoY for F3Q-F4Q 
    • Overall, Celebrity pricing improved in late April.  There was some discounting for FQ2.
    • Azamara pricing was mixed
    • Pullmantur pricing showed good growth considering very easy comps.  The Baltic/North Sea regions particularly stand out.
    • Anthem pricing for 2015 remain unchanged

Chart 2

CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS - rcl2

 

Chart 3

CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS - rcl3

  • Asia/Australia/South America
    • Slight growth in RC brand and Azamara pricing

NCLH

Chart 4 shows NCL pricing continue to be under pressure for FQ2

  • Caribbean
    • Will the bleeding stop?  FQ2 Pricing continued its descent in late April. 
  • Alaska
    • Pricing stabilized in April.  On a YoY basis, pricing remains modestly lower.
    • NCLH has 10% and 18% exposure to Alaska in FQ2 and FQ3.
  • Europe pricing looks outstanding for the summer
  • Hawaii FQ2 summer pricing was weaker in late April

Chart 4

CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS - rcl4

 

STOCK VS SURVEY

 

RCL

Survey has suggested mixed signals for RCL in the past 6 months

 

CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS - rcl5

 

NCLH

Survey has been bearish on NCLH since the 02/12/14 survey

 

CRUISE PRICING SURVEY: PRE-1Q 2014 RCL/NCLH EARNINGS - rcl6


Retail Callouts (4/23): SKX, AMZN, LULU, RSH

Takeaway: Too soon to hop on short-side of SKX? AMZN feeling the weight of sales tax. New LULU copycat with big backers.

EVENTS TO WATCH

 

THURSDAY

  • 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

 

FRIDAY

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

 

COMPANY NEWS

 

SKX - 1Q14 Earnings

 

Retail Callouts (4/23): SKX, AMZN, LULU, RSH - chart1 4 23

 

 

Takeaway: Clean beat by a sizable margin. DD growth in Wholesale, International, and Retail while taking up price by 5% amounted to the 21% revenue growth rate. The only troubling part of the algorithm was flat dot.com sales which management attributed to low inventory levels. Not alarming given that the company comped 5.6% but interesting given just about every other retailers reliance on that channel over the past 6 months. The company got product right - something that it hasn't consistently been able to deliver on in the past. Sustainability of this momentum is the factor to determine now. Getting in on the short side too soon for the legions of perennial SKX haters could prove very painful.

 

AMZN - Amazon Sales Take a Hit in States With Online Tax

(http://www.bloomberg.com/news/2014-04-22/amazon-sales-take-a-hit-in-states-with-online-tax.html)

 

  • "In one of the first efforts to quantify the impact of states accruing more tax revenue from Web purchases, researchers at Ohio State University published a paper this month that found sales dropped for Amazon when the online charge was introduced. In states that have the tax, households reduced their spending on Amazon by about 10 percent compared to those in states that don’t have the levy. For online purchases of more than $300, sales fell by 24 percent, according to the report titled 'The Amazon Tax.'”
  • "In total, brick-and-mortar retailers enjoyed a 2 percent bump in purchases in states that introduced an online sales tax, while competing online retailers got a 20 percent increase, the study found."
  • "The biggest sales uptick -- 61 percent for big-ticket items -- went to merchants that use Amazon Marketplace. These outfits pay Amazon a fee to offer products through the Amazon website, yet don’t collect taxes. The products are typically available alongside Amazon’s own listings."

 

Takeaway: AMZN is the only retailer that doesn't have to protect its margin, because quite frankly, it doesn't ha. It's never had one mostly because it feels that revenues are more defensible. The 10% pullback in revenues in states where AMZN has started collecting state income taxes is less than we'd expect given the 5-10% price advantage it held prior to the tax laws. At some point Congress will pass a law clarifying this issue, whether it’s the Marketplace Fairness Act or something that looks a lot like it. AMZN can afford to play on a level playing field in the tax arena and still compete on price, but the others who this study points to as the biggest beneficiaries of the share gain don't have that pricing power.

 

LULU - Montreal’s Lole takes aim at struggling Lululemon's market

(http://www.theglobeandmail.com/report-on-business/montreals-lole-takes-aim-at-struggling-lululemon-market/article18116318/#dashboard/alerts)

 

  • "Montreal-based Lole...will open a flagship store in the prominent Soho district of New York this spring as a springboard for expansion to the U.S."
  • "On Wednesday, Lole, which started as a wholesaler and branched into retail in 2010, will announce it is financing its plans partly through an investment from several high-profile backers. They include Quebec’s Desmarais family, members of the Hermes luxury fashion dynasty in France and the Simon family, which founded the largest U.S. shopping centre landlord. The group is buying a majority stake in parent company Coalision Inc. from private equity firm Kilmer Capital Partners, whose interest is dropping from 70 per cent to 20 per cent."
  • The retailer’s parent's long-term target is to increase revenues, which are expected to hit $105-million this year, to $1-billion or more annually over the next several years, Bernard Mariette, chief executive officer of Coalision, said….'It’s good timing,' Mr. Mariette, the former CEO of snowboard and surf specialist Quiksilver, said in an interview. 'Every movement in the competition is an opportunity.'”

 

Takeaway: Big backers stepping in behind another LULU copycat. LULU's competition spans the whole gamut - NKE, UA, GPS joined by a whole host of independents. The big players are the most easy to point to as competition but it’s the competition in aggregate that we are concerned with. We still think LULU has a lot of room to run on the top line, but will have to make its pricing model and/or value proposition more attractive in order sustain its market share -- something it's been unable to do since 2012.

 

OTHER NEWS

 

RSH - Top ops exec departs RadioShack

(http://www.retailingtoday.com/article/top-ops-exec-departs-radioshack)

 

  • "Troy Risch resigned his position EVP of store operations at RadioShack the company disclosed in a filing with the Securities and Exchange Commission on Tuesday."
  • "Risch spent 16 months at the troubled electronics retailer and his hiring in January 2013 was seen as somewhat of a coup since had spent 19 years at Target in various operations roles including EVP of stores."
  • "Risch joined RadioShack under the leadership of former interim CEO Dorvin Lively. However, roughly a month after Risch was hired RadioShack named former Duane Reade and Walgreens executive Joe Magnacca president and CEO to replace Lively."

 

ABF - Primark to Open Stores in America

(http://www.wwd.com/retail-news/mass-off-price/primark-to-open-stores-in-america-7653356)

 

  • "Associated British Foods plc said its popular retail brand...would open stores on the east coast of the U.S. starting next year."
  • "Primark signed a lease for some 70,000 square feet of selling space in the historic Burnham Building, which is currently being renovated, at Downtown Crossing in the heart of Boston, Mass. The site was previously home to a Filene’s department store."
  • "The Primark unit is set to open towards the end of 2015, and negotiations are under way to open more locations in the north east, through to the middle of 2016. The U.S. stores will be supported by warehousing in the region, ABF noted."

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VIDEO | Keith's Macro Notebook 4/23: RUSSIA YIELD SPREAD VOLUME


PODCAST | McCullough: Three Risks on My Radar Screen


In this morning’s macro call with subscribers, Hedgeye CEO Keith McCullough discusses three market risks on his global macro radar screen, how to play various markets around the globe, and why investor caution is advised here in the U.S. 



Slow Motion Train Wreck

Client Talking Points

RUSSIA

Russia is getting wrecked (again) on both the stock and bond market front. The Russian 10-year Bond auction effectively failed this morning as the Russian Trading System Index continues to crash. It’s down -0.6% this morning to -18.7% year-to-date – Putin needs oil higher.

YIELD SPREAD

Don’t tell anyone but the 10s/2s Spread has compressed another 6 basis points this week to +227 bps wide. The Financials (XLF) don’t like this and the market needs the Financials to power new all-time bubble highs. Classic #GrowthSlowing signal. 

VOLUME

Total US stock market volume is down -18% and -23% respectively yesterday versus the one month and three month volume averages. #Nice – not. With the Nasdaq still below my 4203 TREND line, FB, AAPL, and QCOM have some heavy lifting to do tonight. Meanwhile, from a US Dollar perspective, I feel like I am watching a slow motion train wreck every morning.

Asset Allocation

CASH 30% US EQUITIES 0%
INTL EQUITIES 10% COMMODITIES 18%
FIXED INCOME 22% INTL CURRENCIES 20%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

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.

DRI

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.

Three for the Road

TWEET OF THE DAY

Gold held $1271 support; Corn, Nat Gas, Wheat all want to make higher highs #InflationAccelerating @KeithMcCullough

QUOTE OF THE DAY

"To live is the rarest thing in the world. Most people exist, that is all." - Oscar Wilde

STAT OF THE DAY

An audit revealed that the IRS paid bonuses to employees  in trouble over tax issues themselves. More than $2.8 million, plus thousands of hours of paid time-off, were doled out over two years to employees who had recently been disciplined for various types of misconduct, according to an audit report. About $1 million of that money was given as bonuses to 1,100 employees who were in trouble over tax related issues. (CNN)


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