Strong secular tailwinds, but one major headwind...




Q1 2014 Results:

  • Global economy "bouncing along" and slightly improving
  • Worldwide presence makes HOT more susceptible to global gyrations
  • Watching Thailand, Egypt, Russia, and Emerging Markets carefully...

North America

  • RevPAR >7%
  • Occupancy at record highs
  • Late cycle: RevPAR should be rate driven, but several years away from new supply in most markets - especially at the high end
  • Momentum continuing into Q2, RevPAR expected in 6-7%


  • RevPAR 2.5% but Q1 is slow season

Africa/Middle East

  • Outlook doesn't include a dramatic improvement
  • 11 hotels pulled results lower
  • Saudi Arabia stronger

Latin AM

  • Mixed, emerging two-tier region
  • Mexico & central:  combined revpar +14%
  • 2nd Tier: Venezuela, Brazil, Argentia - struggling, f(x) issues


  • Expect Q2 slightly slower following strong Q1 results
  • RevPAR +12% driven by Sheraton Macau with 90% occupancy
  • ex Sheraton Macau (Mainland China) 6% RevPAR growth
  • performance stronger than expected
  • inbound travel to china dropped and Central Gov't austerity
  • promoting the company across all segments, markets, and channels
  • >70% occupancy PRC nationals
  • Fewer large customers, few long lead time clients, booking window short/close in
  • Results driven by increasing occupancy and not rates

Other Asia

  • Bangkok: riots hurt results
  • Thailand: much stronger
  • Asia ex China continue growth trends

Bal Harbour:

  • only two condo remain unsold

Secular Growth in Cities:

  • Top 100 Cities = 40% of global GDP
  • Next 500 Cities = almost 40% of global GDP
  • these 500 Cities = new development opportunity (Sheraton, Westin, St. Regis)
  • 200 cities global that could support at least one Sheraton and not have a Sheraton today

Q&A - 5 of the 12 questions focused on share repurchase strategy or capital plans.  The natives are getting restless...

  • Share repurchase vs. special dividends:
    • constantly recalibrating how to return to shareholders will use dividend, special dividend and share repurchase avenues
    • special dividends: not adverse to one-time, like flexibility of quarterly
  • Asset sales:
    • now have more asset for sale since the global financial crisis
    • North American portfolio, as well as assets in Europe and Asia
  • Asset buyer profile
    • Europe/Large one-offs:  UHNW family or person, sovereign wealth
    • US: portfolio sales to PE, funds, or private buyer
    • Geographic:  Middle East and ethic Chinese around the world
  • Stock under performance due to lack of share repurchase vs. Emerging Market issues...
  • NA system wide vs. owned RevPAR differential:  less than 20 NA owned, skewed to NYC and Canada = Q1 under performance, purely geographic
  • Corp Negotiated:  mid single digits rates
  • Corp Group:  stronger and healthiest of all group
  • Corp Group F&B:  still focused on keeping costs down
  • US:  1/3 group with long lead time vs. 2/3 non-group
    • Non-US: 1/4 group with short lead time
  • Airbnb:  real phenomenon, disruptive, concern is similar to OTA onset 10 year ago.
  • Termination Fees:  anticipated for Q1 2014, 8%-10% growth for Q2 and FY 2014
  • Underlevered Balance Sheet indicate interest in reinvesting through a brand acquisition?
  • Europe:  70-75% business traveler world-wide, but destination hotels in Italy, France, Spain so summer mix is skewed to leisure - summer will tell if Europe bounces strongly higher. 


In-line with trends seen from our pricing survey




  • MIXED:  As expected, the Caribbean continues to be the major risk that faces RCL and its competitors over the near-term.  Expectations were high heading into the print and while RCL underwhelmed on the yield side, particularly in 2Q as we warned, it was offset by better cost controls and a strengthening recovery in Europe.  


  • BETTER:  Post-Wave bookings in March/April have exceeded seasonal expectations
  • PREVIOUSLY:  Entered 2014 in a very strong book position with 5% more revenue on the book YoY


  • WORSE:  Despite efforts by management to touch this topic from different angles, the truth is Caribbean has underperformed their expectations since the beginning of the year and continue to be pressured by the promotions from NCLH and CCL. 
    • Booked load factors and rates for the Caribbean are lower than the same time last year, and expect yields for 2014 to be down for the Caribbean by low single digits.
    • The Caribbean is weaker due to two factors: firstly, it's the areas hardest hit by the media storm of 2013; and secondly, a large capacity increase here, for both the company and the industry of 13%.
    • Longer-dated itineraries holding better than shorter-dated ones


  • SAME:  RCL continues to display pricing power in this market.  The recovery of the Southern Europe pricing is reassuring.  RCL expects double digit yield growth for 2014.
  • PREVIOUSLY:  Booked load factors and APDs are significantly higher YoY.  Expecting another year of significant yield improvement in Europe and expect yields to surpass pre-recessionary levels.


  • SAME:  Expects double digit yield growth in 2014
  • PREVIOUSLY:  Booked load factors and APDs remain ahead YoY despite a 12% increase in capacity. Expect yields to be up nicely for our Asia-Pacific itinerary.


  • SAME:  Expects low-mid single digit yield growth in 2014
  • PREVIOUSLY:  Feel fairly confident on how Alaska shapes up 


  • SLIGHTLY BETTER:  There was no mention of further deterioration in this brand.  The strength of the Spanish market should also provided a boost to Pullmantur.
  • PREVIOUSLY:  Expect the greatest relative benefit
    • Most visible changes involve the shift to having a Latin American headquarters and the recent sale of Pullmantur's non-cruise businesses
    • Immediate growth in Latin America should be significant. Expect this transformation to take some time, and for 2014, the year will be a transitional year.  Expect the biggest benefits of Pullmantur's changes to occur in 2015 and beyond.

Onboard revenue:

  • SAME:  Gaming and beverages led the 3.4% growth in Q1 onboard yields
    • Benefits from ship revitalization program, packaging initiatives, as well as shore excursion enhancements, drove onboard revenue
    • Seeing strength across every single revenue stream and from every single market. So the entire story is positive. There's just a general uplift across all brands.

Promotional environment:

  • WORSE:  Ever after normal Wave promotions, the Caribbean continues to discount.
  • PREVIOUSLY:   Regular, nothing unusual

Ship incidents:

  • WORSE:  6 ship incidents in Q1 (oil spill in Gulf, damaged propeller in Tokyo affected 2 sailing, norovirus, etc.) impacted Q1 earnings by 5 cents and yields by 0.5%
  • PREVIOUSLY:  Don't expect that the impact of this event (norovirus) will be significant or meaningful to the company or its result.


RCL is fortunate to have more cost cuts in the bag and a stronger Europe/Asia business.  But there is no question that the Caribbean has gotten weaker. 




  • TUI JV:  Mein Sciff 3 will take delivery one month from today
    • Will have scrubbers
  • Installing new O3B internet systems to increase internet bandwidth for Oasis of the Seas.  Could roll out to more ships as well.
  • 1Q:  oil spill in Gulf, damaged propeller in Tokyo affected 2 sailings  
  • 1Q 2013:  record yields
  • 1Q Caribbean:  2/3 of capacity
  • Settled maturity of 1BN euro bond in 1Q
  • 2014:  will recognize $23MM in restructuring expenses and $11MM loss associated with Pullmantur tour business.  $19.6MM was included in 1Q and rest will be recognized later this year.
  • Bookings volume:  have been accelerating, bookings up 20% YoY, driven partly by Caribbean discounting.  APDs are high.
  • More bullish on Europe and China and incorporated more conservative outlook in Caribbean.
  • Pricing pressure on Caribbean (3-7 night itineraries)
  • Caribbean capacity is higher in Q2 than in all other quarters; expect largest yield decline there.
  • European sailngs are at higher prices and volume.  US source market particularly strong.  Finally seeing pricing recovery in Southern Europe
  • Asia:  continue to exceed pricing and volume expectations.
  • Costs:  Inflation pressures, rising insurance premiums, and nominal capacity growth
  • Caribbean:  
    • Continuing to experience significant promotional activity
    • Yields to be down slightly 
    • Guidance assumes continued promotional activity for rest of year
    • Oasis continue to command highest premiums 
  • Bookings in March/April up double digits
  • Quantum of the Seas:  Dynamic Dining exceptionally well-received
  • Marnier and Voyager of the Seas doing well in Asia
  • Strong onboard revenue in Asia will improve further
    • Expect double digit yield improvement in 2014
  • Europe:  capacity-adjusted bookings up 25% YoY; load factors highest since 2007
    • Demand from NA particularly strong
    • 80% NA bookings on the books for 2014, considerably higher than that of last year
    • Northern Europe/Med: doing well
    • 2014:  Yields up double digits
  • Alaska:  solid performer; anticipate highest yielding product in 2Q/3Q
    • Low-mid single yield growth for 2014
  • Expect more marketing for Asia later this year


Q & A

  • 1Q incidents:  all were small e.g. Explorer norovirus
  • Caribbean:  booking trends lower but normal since it's post-Wave but more volume than normally in March/April.  
  • Surprised post-Wave volumes were stronger than historically been
  • Caribbean:  weaker yields today than in January;  have been weaker than what mgmt expected
  • Caribbean capacity in 2015:  very slightly up
  • Quantum pricing in China vs Caribbean:  very confident the ship will do well in Caribbean and Asia (ticket/onboard)
  • China is more expensive to operate in
  • 1Q Caribbean capacity deployment was higher before Quantum move.  After move, it is basically flat
  • China is in a profitable position today
  • Still sees opportunity in Latin America and South America e.g. Pullmantur
  • High costs in Brazil
  • Canyon Ranch:  finished transition to Celebrity in less than 4 wks; not much disruption
  • 1Q Onboard strength:  gaming and beverage
  • Strength in Spain, UK, and Ireland markets
  • Med: less capacity YoY, more strength from Southern Europe, better distribution channels
  • Pullmantur tour business:  +/- zero for a couple of years; sold in late January
    • Not included in previous and current guidance 
  • Revitalizations have helped onboard revenue
  • 3 Asian source market developments:  Quantum in Shanghai; Tianjin/Bejing region; Pearl River Delta/Hong Kong region

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FDA Finally Proposes E-Cigarette Regulations - They’re Surprisingly Mild!

This morning the FDA proposed a new rule that would extend the agency’s tobacco authority to cover additional tobacco products not previously regulated – e-cigarettes, cigars, pipe tobacco, nicotine gels, waterpipe (or hookah) tobacco, and other dissolvables. 


Our focus is the e-cigarette impact, which we’ll go through below, however of note upfront is how surprisingly mild the proposed rules are – our work with most major e-cigarette manufacturers suggested they were expecting even more “deeming” regulations. 


We view today’s proposed regulations as having no negative impact on Lorillard (LO), our preferred tobacco stock, and in some cases may benefit the larger e-cigarette manufacturers.


What’s in the Proposed Regulation?

  • Manufacturers must register with the FDA and report product and ingredient listings. Producers would also be subject to FDA inspections
  • Manufacturers may only market new tobacco products after FDA review, but would have two years after the new rules are finalized to do so -- in the meantime companies can keep their products on the market
  • Ban on the sale of e-cigarettes, cigars and pipe tobacco to anyone under 18 (requiring people buying them to show photo identification to prove their age, measures already mandated in a number of states)
  • Manufacturers would no longer be able to offer free samples
  •  E-cigarettes would have to come with warning labels saying that they contain nicotine, which is addictive
  • Companies would not be able to assert that e-cigarettes are less harmful than real cigarettes unless they got approval from the F.D.A. to do so by submitting scientific information
  • No sales of e-cigarettes in vending machines in public places where minors are allowed

What Wasn’t Touched in the Proposed Regulation?

  • No proposal to ban flavors in e-cigarettes and cigars
  • No move to restrict the marketing of e-cigarettes
  • No proposal to ban online sales, only age verification

The proposed regulation is likely step 1 as the FDA tries to better understand the science of e-cigarettes, user trends, and to get the ball rolling on regulation after dragging its feet on a proposal for many months.  This proposal is now open to a public comment for 75 days, and then the agency will make final changes, a process that will likely be counted in months.


We view today’s proposals, even if they all become final, as positive for our bullish call on Lorillard and its e-cigarette blu:

  • The regulations could serve to consolidate the industry given the FDA registration and ingredient requirements
  • blu can maintain selling its flavored e-cigarettes
  • No ban on marketing will serve Big Tobacco’s deeper marketing spend pockets

Call or email with questions,



Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Regional headwinds continue.  April soft.  Guidance also hurt by the removal of Sioux City from guidance - finally.



Q1 2014 Results:

  • Difficult weather first 6-7 week = soft revenue
  • Consumer environment, esp low end <$100 losing trips and customers
  • Competition more intense at Charlestown, L'Burg and entire Illinois
  • Property level margins unchanged, despite lower GGR
  • +5% YoY data base customer spend
  • Visitation trends "very concerning" esp. Charlestown & L'Burg
  • Lower EBITDA guidance:  50% is Charlestown & L'Burg
  • Easter Weekend: visitation and GGR trends DOWN 20% YoY!
  • March soft, April continuing with March trends

Remainder of 2014:

Expected a transitional year due to new supply but more challenging year than expected due to persistent customer softness

  • Forecasting constant margins
  • Revised pre-opening expenses
  • Removed Argosy Sioux City from forecast
  • Maintenance CapEx $80M total for the year

2015/2016 - positive outlook based on development pipeline

  • Mahoney on target for early fall opening
  • Plainville expect to open 2Q15
  • Jamul Village expected to open "early 2016"
  • NY Catskills, partner with Cordish $750m Orange County development, filed $1m app w/ NYS, final app due June 30th


  • Ohio Track Expectations:  Dayton & Mahoney Valley no changes to pro forma plan & expectations
  • EBITDAR: rent credit adjustment under master lease in remainder of the year
  • NY Outlook:
    • Catskills: managed 50/50 JV with Cordis, very excited
    • Capital Region: looking, not sure of capital commitment, more difficult due to protection on purse supplement to race tracks.
  • MA Gaming Act recall:  continuing construction, full steam ahead, believe voters will understand 10,000 jobs and revenues to state. 
  • WPD per slot $500 for 1st 2 years until new competition opens
  • Jumal: $200-$250 win/unit/day target
  • IL VLT:  27% of all IL GGR and cannibalizing casino GGR
  • FCF 7% or better on all new development opportunities and expect NY Orange County to hit or exceed target
  • Promoting less in St. Louis than last year - GGR is reported by the state gross not net so net growth will be higher
  • Demand picked up from mid-Feb to mid-March
  • Guidance: toward the end of March to current, demand has softened resulting in lower guidance
  • Project Capex:  budget for full year $72m in Ma, $70m in each of Dayton and Youngstown, Jamul $84m
  • 25% more weather impacted days in 2014 vs 2013 - can't really quantify the impact
  • Weakness is across the demographic spectrum at the <$100 segment
  • No change in enthusiasm for gambling - weakness is purely economic - especially for households <$75k in income
  • Harrah's Tunica:  demand for Tunica hurt by Arkansas. PENN doesn't see a repurposing of the asset.
  • Optimistic on Toledo - one of the worst winters ever in Q1
  • Cosmopolitan - $2b is too high.  PENN has not actively engaged but if they did they would need a partner
  • PENN still looking at a Strip property




















The Hour Between Dog And Wolf | $DRI

Takeaway: The sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.

The Hour Between Dog And Wolf | $DRI - 1389668 bigthumbnail


Yesterday was a big day – DRI rose 3.5% on 2x the average daily volume.  As we’ve said before, the theme here is consistent: The stock rises on days change is in the air and falls when management publicly digs their heels in.


The title of this note derives from the French saying: “L’heure entre chien et loup.” It refers to the moments following sunset, when the sky darkens and vision becomes unclear, making it difficult to distinguish between dogs and wolves.


We’re using this expression to create a metaphor for the uncomfortable situation that is unfolding at Darden, following the news that Starboard Value has won shareholder consent to call a Special Meeting. With yesterday’s victory, the sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.


From where we sit, there is enough light to see the animal in front of them is a dog. Unfortunately, management appears predisposed to a certain view. As a result, they see a wolf and, by extension, feel trapped. It didn’t have to be this way. The truth is, there is a way out of this situation that would leave all constituents feeling safe and shareholders feeling happy. For some reason, this has been so unclear to the powers that be in Orlando.


Part of the haze may be stemming from the notion that Starboard only got 55% of shareholders to consent. On the surface, this might appear like a slim margin of victory. However, the turnover since the record date, shares short and the retail component are all factors that suggest this is a convincing margin of victory. We hope Darden’s advisors will give the Board and management a straight story, so that they can see the situation more clearly. If they wait until nightfall, however, we suspect that dog could soon become a wolf.


This French saying also highlights the stark contrast between the “familiar and comfortable” and the “unknown and dangerous.” Ever since activists began pushing for change at Darden, management has retreated and found solace in the confines of Orlando, where they have lived a comfortable life for many years. Between the lifestyle they are fighting to protect and the considerable financial resources at their disposal, they have been unwilling to face the harsh reality of the situation. In its 18 years as a public company, Darden has never found itself in a similar situation. Knowing how to properly respond, therefore, can be a daunting task.


Under significant pressure, CEO Clarence Otis has been unwilling to hold himself accountable for his decisions. For example, Mr. Otis failed to stress test his plans to create shareholder value with critical Wall Street analysts, opting, instead, to conduct one-on-one meetings with shareholders. Alas, the moat he has built around his castle is not serving him well. As a result, the Board and management now find themselves in the center of a very uncomfortable situation in which they are losing control of the company.


Yesterday, Jeffrey C. Smith, Managing Member, Chief Executive Officer and Chief Investment Officer of Starboard Value LP, went on CNBC to discuss Darden’s proposed separation of Red Lobster. Reading between the lines, Mr. Smith is very clear about what needs to happen at Darden:


“There clearly have been operational issues and clearly there are strategic issues now and that all starts at the top. I mean, so as a shareholder, our power, our control is with the Board. Our power is, in theory, at some point to be able to nominate directors and potentially replace the Board if they’re not doing a great job in overseeing management and how the business is being run. The biggest decision for a board is in choosing the CEO and continuing to choose the CEO and I think there are some strategic issues here and operational issues. So, is Mr. Otis in a hot seat?  I think he is in a hot seat.”


The shareholders of Darden have spoken – it is time for significant change.


One wild card, and a current “unknown” to outsiders, is the financial performance of Darden to-date in 4QF14. With nearly two-thirds of the quarter in the books, management knows precisely how the period is shaping up. The leverage they might have with shareholders is to prove their recent operational initiatives are gaining traction. However, given the current data we are seeing on sales trends, we highly doubt there will be much good news to talk about when they report earnings. In fact, considering the lack of momentum in the business, we expect to hear disappointing guidance for FY15. Even after two disastrous years of -10% and approximately -25% EPS growth, it’s unlikely they will be able to hit the current consensus estimate of 12% EPS growth in FY15.


Change is in the air.


*   *   *   *   *   *   *


Editor's Note: This note was originally sent to subscribers on April 23, 2014 at 8:16 a.m EST by Hedgeye Restaurants sector head Howard Penney. Follow Howard on Twitter @HedgeyeHWP.

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