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Rising Oil Prices Aren’t Going to Help What Ails US Consumers

Takeaway: Another #ConsumerSlowing catalyst for the U.S.

After holding CEO Keith McCullough’s TREND line of support yesterday, WTI crude is up to $101.91 today. It has no resistance to $105.03.


It is another #ConsumerSlowing catalyst for the United States. Never mind CRB Food Stuffs which is up over 21% YTD.  Sure, the 7:1 iSplit from AAPL was cool, but there’s this other thing called Global Macro risk. That’s still going on.


On the other hand, if you don’t eat, and you don’t put gas in your car, you’re all set.

Rising Oil Prices Aren’t Going to Help What Ails US Consumers - Crude

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UA - Brand Heat Has A Price

Takeaway: UA could not afford even the slightest blemish this qtr, unfortunately. We were more impressed w Plank than anything else in 1Q.

Conclusion: Not the quarter a 50x multiple needed. We remain confident that this company will double – at least – over 5-years. But will continue to spend heavily to achieve that goal. One thing we’ve got to give UA regardless of margin trajectory – this management team is as focused as any we know. LULU should pay attention. So should Nike, for that matter.  The bottom line on UA is that despite the Brand heat, we have zero interest in owning the stock at this stratospheric valuation.


Overall, it was a great quarter for UnderArmour when viewed in isolation.  Unfortunately, the market does not view things in isolation – nor do we.  Let’s be real about something…when you trade at over 50x earnings and nearly 30x EBITDA with short interest at a 30-month low, and are following a blow-out quarter where you added $1.7bn in Enterprise Value in a single day (to what was a mid-cap stock) there is literally zero room for any blemishes in the quarter. That’s not our rule, but it is the market’s. There were one or two minor blemishes in this print.


People obviously did not love UA’s guidance for the upcoming year. UA beat by $43mm in revenue, but only took up full-year guidance by $40mm. Yes, we realize how punitive of a statement that is for a company that will double in size over the next five years, and is probably sandbagging guidance anyway. UA is no better or worse than other companies at the guidance game. But at this valuation, it matters more than it does for others.


There’s a couple of things related to the company’s revenue strength that really stand out to us.

  • Investment: The first is it’s level of investment. While margins were up 132bp this quarter, we should look at it over a longer time period. Over the past 5-years UA added $440mm in 1Q revenue – a huge feat given that it has largely done so in a singular market (the US). But at the same time, it has only added $19mm in incremental 1Q EBIT. That’s an incremental margin of only 4.3%. Nothing to write home about by any stretch.  We’re not knocking UA by any means. It’s doing what it should – a) have confidence in strategic plan, b) spend around the highest growth opportunities, and c) grow top line at 2-3x the rate of competitors. We’re still probably a few billion in revenue away from the efficacy of this model being at risk. This is great for growth, but anyone holding out for margin expansion should probably look elsewhere.
  • The Plank Factor: The other major factor as it relates to UA’s Brand Heat rests with its fearless leader. In the company’s early years, we were critical of Kevin Plank as he came across as arrogant, unfocused, and seemed to foster a ‘clubby’ environment within the company. While this evolution has taken place over a number of years, there was something about Plank today on the call that seemed exceptionally mature, seasoned, focused, and not only a great Brand ambassador (which he’s always been) but a flat-out solid leader for UnderArmour. The interesting comparison is with Nike, which we’ve followed very closely since the 1990s. We never thought we’d say this, but Kevin Plank appears to be a better leader than Phil Knight was at a similar point as CEO.





UA - Brand Heat Has A Price - UA financials


UA - Brand Heat Has A Price - UA sigma

Cartoon of the Day: Bull$#&%!

Takeaway: Mom and Pops aren't buying into the bull market.

The average American is still wary of the stock market, according to a survey released earlier this week by Bankrate.com. The survey of over 1,000 households showed that 73% are "not more inclined to invest in stocks." It was the third year in a row that individual investors expressed a negative view of the stock market.

Cartoon of the Day: Bull$#&%! - Bull 04.24.2014

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In an effort to evaluate performance, we compare how Q1 2104 measured up to previous management commentary and guidance




BETTER - The fears surrounding an emerging markets slowdown didn't show this quarter and as a result adjusted EBITDA exceeded our our higher than consensus forecast.  Management, Franchise and Other Fees were higher than forecast as well.  No problems with management's operating ability but the company's financial policy continues to hold the stock back.


HOT Q1 2014 REPORT CARD - HOT Chart1


North America:

    • 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, we expect North American REVPAR growth to continue to pace in the upper half of the range of 5 to 7%.
    • Adjusting for the Easter shift, into April, this momentum has continued into Q2.
    • North America picking up steam 
    • We’ve seen three quarters in a row of record occupancy
    • The lodging recovery in North America continued unabated
    • Owned hotels saw REVPAR up nearly 10% and margins up 350 bps
    • We expect North American REVPAR growth at the upper end of our 5% to 7% outlook range, with rate accounting for 75% to 80% of the increase


  • SAME:
    • RevPAR 2.5% but Q1 is slow season
    • We need to see better rate gains in Europe and we need more robust demand. Until that happens Europe growth will stay in the 2% to 4% range like we experienced for the past two years
    • Ended the year well, with REVPAR up over 4% in local currencies in Q4
    • Occupancy remained high, nearly 68% for the full year 2013
    • European economies remain fragile and the euro could still be an issue, we’re hopeful that the improving trend will continue
    • In Q4, we saw mid-single digit REVPAR growth in: Spain, Italy, and the U.K - only Germany was a little soft
    • We assume Europe REVPAR growth in 2014 will be at the low end of our worldwide outlook range
    • Europe also had a good January, but it’s the low season
    • We’ll have to wait until March and April to get a better sense of the European trend in 2014


    • performance stronger than expected
    • 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
    • promoting the company across all segments, markets, and channels
    • >70% occupancy PRC nationals
    • Results driven by increasing occupancy and not rates
    • China now represents a meaningful piece of our global business, accounting for 13% of our fee revenues
    • China is rebounding
    • Expect Asia REVPAR to continue to grow at the high end of our global REVPAR outlook range of 5% to 7%

Latin America:

  • SAME:
    • Mixed, emerging two-tier region
    • Mexico & central:  combined revpar +14%
    • 2nd Tier: Venezuela, Brazil, Argentia - struggling, f(x) issues
    • REVPAR is forecasted to grow in the lower half of our 5% to 7% outlook range
    • Same-store owned REVPAR to grow 4% to 6% in local currencies globally, with margin gains of 75 to 125bps
    • Disparate results across the region
    • Mexico continued to rebound, starting with resorts and followed by urban locations
    • Brazil’s the outlook remains unclear but The World Cup should help Brazil and the Sheraton Rio is coming out of renovation
    • Argentina was still a mess and reaching the acute stag
    • Even with the most recent peso devaluation, the gap between the official and unofficial exchange rate remains large


  • SAME:    Group business continues to pace in the mid-single digits with smaller group corporate business especially strong while larger group Association business remains weak.  All in all rates are in the mid-single digits in some of these corporate negotiated rates certainly corporate groups are the healthiest of all the group business. Corporate group business does tend to be booked were shorter lead times
    • Negotiated corporate rates are up in the mid-single digits for 2014
    • Group pace for 2014 is pacing in the mid-single digits
    • We are starting to see the return of incentive travel


  • SAME: SG&A are expected to increase by approximately 3% to 5%.
    • SG&A growth is expected to stay in the 3% to 5% range, even as we make infrastructure investments in growth markets and in new capabilities

Share buyback/dividends:

  • WORSE:
    • no share repurchase activity during Q1 nor QTD in Q2 - investors disappointed, as they should be - ridiculously low leverage
    • 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
    • For 2014, we’ll work hard to continue returning cash to shareholders via - Ordinary dividends, Special dividends, and share repurchases
    • Four planned special dividends associated with the $500 million in cash from the completion of the Bal Harbour project.
    • We have a healthy dividend with an almost 50% payout ratio and a 1.8% yield
    • The Company’s share repurchase authorization has increased by an additional $250 million. As of October 30, 2013, the total amount available under the authorization is approximately $614 million.

 Asset sales:

  • SAME:
    • 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
    • The (buyers) markets are becoming deeper, and there are more buyers now seeking to deploy larger amounts of money.
    • Used to be the public REITs buying single assets, we now see portfolio buyers, and we believe private equity buyers have returned and soveigns are definitely back.
    • This is prime time for asset sales and we intend to fully take advantage of it.
    • Cap rates: we’ve seen sub-5% cap rates on some of our better hotels and 6% to 7% on some of the more suburban and airport hotels.
    • We certainly don’t want to wait until the 11th hour. On the other hand, being patient in selling assets up until now, I think, has worked in the interest of shareholders, not the other way around


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




  • WORSE:  Sloppy quarter and worse guidance.  Removing Sioux City surprisingly surprised some people.  We think regional trends will improve sequentially from here but for now there is not much to get excited about.  Problems seem concentrated with Indiana and West Virginia.


Consumer trends:

  • WORSE:  Very soft visitation and revenue environment, particularly at Charles Town and L'Auberge.  Poor demand from the <$100 segment.
  • PREVIOUSLY:  Relatively soft and cautious consumer environment, particularly at the lower end worth statements of our rated database, those who typically spend a $100 or less per gaming visit.

Promotional environment:

  • BETTER:  Promoting less in St. Louis region. Other regions are still promotional but steady. 
  • PREVIOUSLY:  Promotional environments remain mostly rational in our competitive markets


  • SAME:  Expect to open 2Q 2015
    • Feel comfortable with a 20% stabilized ROI
    • (03/14/14) broke ground on the property

New Competitors:

  • WORSE:  Competition is becoming more fierce in Lawrenceburg and Charles Town.  Mgmt blamed underperformance in these two markets for the lowered guidance.
    • Starting in Charles Town, clearly the opening of Horseshoe Baltimore in the August-September time period will have far less effect from what PENN saw with Maryland Live opening up in 2012 and then adding table games in 2013. 
    • Similarly in Lawrenceburg, the Horseshoe Cincinnati effect on Lawrenceburg will certainly have a much greater effect on the Miami Valley opening, which occurred about a little less than two months ago, and a less of effect of what's going to happen with River Downs or Belterra Park opening up. 

Cost efficiencies:

  • BETTER:  1Q corp expense and stock comp was better than forecasted
    • There are still some additional operating efficiencies out there to pursue...That includes, obviously, payroll. We still have approximately 25% of our labor costs remain variable, so there's opportunities there. 
    • [Marketing] tend to be very disciplined.


  • SAME:  Toledo was impacted by the most snowfall on record in 1Q.  Absent weather, mgmt was encouraged by the property performance. 
    • Expect Toledo to grow bc PENN don't really any other supply affecting that business as they go into the balance of 2014 into 2015
    • (Columbus):  Dayton and Miami Valley operation will have some dampening effect on Columbus as PENN absorb that supply


  • SAME:  continues on budget and scheduled to open early this fall
    • Fall 2014 opening
    • Opening up with 1,000 in Dayton and about 850 in Austintown and be able to grow beyond that as demand warrants.
    • Still looking at margins in those two racinos in the high 20%s or better.


  • SAME: Will open 1Q 2016 
  • PREVIOUSLY:  Early 2016 opening

Housing: Hiccup or Harbinger?

Takeaway: We expect the slope on housing activity to remain negative.

Housing: Hiccup or Harbinger? - house



We recently detailed our expectation for a #HousingSlowdown in our Q2 2014 Macro themes call. Incidentally, we’ll be launching comprehensive coverage of housing in the next few weeks. 


The housing data of the last few days continues to offer further, positive confirmation of the marked, and geographically pervasive, slowdown in housing demand. 


Home price growth follows the slope of demand and current demand measures (Existing/Pending/New Home Sales) continue to flag while mortgage application data through mid-April is signaling a further deceleration in forward transaction activity.   


That the deceleration in activity is occurring in the face of both the positive shift in weather and declining interest rates makes it that much more notable. 


While weather probably exaggerated some of the underlying weakness to start the year, we continue to think that the collective impact of stagnant income growth, declining affordability, a reversal in institutional interest, and the implementation of QM regulations will serve to pressure housing demand over the intermediate term. 

Summary highlight of recent data  


APRIL DATA:  The NAHB HMI and weekly MBA mortgage data represent a couple of the most real-time measures of existent demand/sentiment trends and both continue to signal weakness.

  • Mortgage Applications: The composite mortgage application index declined 3.3% week-over-week as the Purchase Applications and Refinance sub-indices hit new lows in year-over-year growth.  As it stands, Purchase Applications are down -19.3% off peak and -18.5% YoY while refinance activity is down -71% YoY! 

Housing: Hiccup or Harbinger? - Mortgage Apps 042314

  • NAHB HMI: Headline NAHB confidence increased 1 point month-over-month in April versus the downwardly revised March print with builder confidence flat or down across geographies with the exception of the Northeast. Confidence in the West region slid for a third consecutive month, continuing its expedited 26 point drawdown from a peak reading of 71 just three months ago. The composite index is now down 10 points off its December peak of 57.

Housing: Hiccup or Harbinger? - NAHB April

Housing: Hiccup or Harbinger? - NAHB Regional


MARCH DATA:  Home price growth decelerated and both Existing and New Home Sales slowed sequentially in March. The slowdown, coming post the weather inflection, was again pervasive across geographies, further confuting the "its the weather" in isolation thesis.   

  • Existing Home Sales: Existing Home Sales declined -0.2% MoM and -8% YoY – accelerating 70 bps versus the -7.3% decline in February. Sales were down across geographies with the West region again leading the declines.

Housing: Hiccup or Harbinger? - Existing Home Sales by Region march

  • New Home Sales: New Home sales declined -13% YoY, marking the 1st month of negative year-over-year growth since September of 2011. The Northeast was the lone region recording a MoM increase in sales while year-over-year sales growth declined across all geographies.

Housing: Hiccup or Harbinger? - New Home Sales by Region

Housing: Hiccup or Harbinger? - New Home Sales by Region march

  • Corelogic HPI: The preliminary estimate is for a sequential deceleration of 160bps in home price growth in March – the slowest pace of growth in 13 months and the largest sequential deceleration since June of 2006.  As a reminder, the March/April data will be the first to reflect any early impacts of QM implementation, which went into effect on January 10.    

Housing: Hiccup or Harbinger? - Corelogic March 

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Editor's Note: This note was originally sent to subscribers on April 23, 2014 by Hedgeye Macro Analyst Christian Drake. Follow Christian on Twitter @HedgeyeUSA.


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