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CCL F2Q 2014 REPORT CARD

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

 

CCL F2Q 2014 REPORT CARD - ccl1 

 

CCL F2Q 2014 REPORT CARD - ccl2

 

OVERALL

  • MIXED:  Every quarter, CCL manages to mess something up.  This time, management is blaming lower forward occupancy in the Caribbean. However, we are encouraged by the pricing environment we're seeing out of the Caribbean (even if it is uneven among their brands) and if pricing is sustained, this will bode well for 2015 performance in that region, in the face of declining supply.  While the hold price and sacrifice occupancy strategy may prove risky for CCL for another quarter, the pieces are set for CCL, at least, to meet their internal expectations for the year.  While we were neutral heading into today's print, we continue to believe CCL has to overcome the lowest bar among the 3 big operators this year; CCL should not set it any lower. 

 

CARNIVAL CRUISE LINE BRAND 

  • MIXED:  Pricing is better at the expense of lower occupancy
  • PREVIOUSLY:  
    • Cautiously optimistic pricing will continue to firm and improve. 
    • On a number of voyages, willing to give up a couple of points of occupancy to hold price

BOOKINGS

  • WORSE:  Since March, fleetwide booking volumes for the next three quarters are running slightly behind, due to North America bookings. Mgmt expects the booking curve to continue to lengthen.
  • PREVIOUSLY:  
    • Fleet-wide booking values during this year's wave season have been running almost 20% ahead of the prior year, significantly outpacing capacity, albeit at lower prices.
    • Cumulative bookings for the next three quarters were ahead of the prior year as overall booking curve has started to lengthen.
    • Currently still toward the lower end of historical booking curve.

COSTA

  • SAME:  Costa continues to improve its performance in F2Q.  Spain was one region of particular strength.
  • PREVIOUSLY:  
    • Costa achieved strong booking volumes during wave season, and in fact, we were almost up 50% year-over-year.  We've seen a continued improvement in perception with an almost doubling of trust and confidence in the core Italian market. 
    • The European economy is still choppy, but it's obviously strengthened. And we do see accelerated progress in the Costa brand

NA BRANDS (EX ALASKA)

  • WORSE:  NA yields will be slightly negative (down from slightly positive) with the Caribbean behind on occupancy.
  • PREVIOUSLY:  
    • Our North American brands have caught up on occupancy compared to prior year
    • Seasonal European program for NA brands is strong; well ahead on both price and occupancy.

ALASKA

  • BETTER:  nicely ahead on both price and occupancy
  • PREVIOUSLY:  
    • Behind on price but well ahead on occupancy, which bodes very well for pricing on the remaining inventory.

EAA BRANDS

  • BETTER:   Significantly ahead on occupancy with flat pricing. 
  • PREVIOUSLY:   Year-round European program, which represents 70% of the EAA brands capacity for the remainder of the year, is behind on price but well ahead on occupancy.  Recent booking volumes have been substantially ahead of last year, which again bodes well for pricing on the remaining inventory.

JAPAN

  • SAME:  The weak 3Q guidance was partially attributed to Japan  (Princess brand)
  • PREVIOUSLY: 3Q will be impacted to some degree by Japan

COSTS

  • BETTER:  Lowered FY NCC ex fuel guidance to 'flat to slightly up'.  Mgmt sees opportunities for cost cuts in its air program for 2015.
  • PREVIOUSLY: 
    • Increased our investment in advertising and expect to spend over $600 million in 2014.
    • Crew travel and ports are two examples of large areas where CCL is conducting deeper dives.  CCL is still at early stage in sizing the [cost] opportunities in these and other categories. 

CCL F2Q CONF CALL NOTES

Caribbean pricing holding well at the expense of lower forward bookings for 3Q. Once again, CCL offered guidance that is beatable but the unchanged, ambiguous language concerning full-year yields is disconcerting.

 

 

CONF CALL 

  • Turn a bit of a corner; inflection point for the company
  • European yields turned positive in 2Q
  • Favorable pricing in North America and Europe
  • Making every effort to maintain pricing
  • Gave up some occupancy in Southern Caribbean segment to keep pricing
  • Aggressive pricing by competitors in Caribbean
  • In 2015, expect flat capacity in Europe and Alaska, and slight reduction in Caribbean deployment with notable double digit decline in 3Q 2015
  • Asia/Australia capacity will be up mid-high teens in 2015
  • (Ibero) Grand Celebration will become Costa Celebration 
  • 5 ships leaving or sold from fleet in 2014/2015 (including 3 Seabourn, 1 Costa); new ships in 2016 will replace this capacity loss
  • Remain on track to reduce fuel consumption by 25% in 2014 when compared to 2007
  • 2Q:  
    • Better performance driven by better net revenue yields worth $0.04 (split btw ticket and onboard and other)
    • Capacity increased 5%
      • NA brands +8%; EAA brands flat
    • Net ticket yields -4%; NA ticket yields -7%; EAA ticket yields: +2%
    • Net onboard/other yields: +2.6%
  • Overall booking curve continues to lengthen; anticipate this trend will continue
  • Cumulative bookings:
    • EAA brands significantly ahead on occupancy with flat prices, which bodes well for pricing on remaining inventory
    • NA brands ahead on price but behind on occupancy as a result of large increase in industry capacty in Caribbean
  • Epect EAA brand yields turned positive in 2Q and will be positive for rest of year
  • Don't expect NA yields to turn positive until 4Q
  • Forecasting slightly lower occupancies for 3Q
  • Back half of year forecast has not changed-with slight improvement in 4Q offset lower occupancy in 3Q
  • NA brands:
    • Caribbean: behind on occupancy but ahead on price; 44% capacity for remainder of year for NA brands; booking volumes have been good.
    • Alaska:  nicely ahead on both price and occupancy, which bodes well for remaining inventory
    • Seasonal Europe program for NA brands are strong - well ahead on both price and occupancy.
  • EAA brands:  
    • European program represents ~80% of EAA brands' capacity- significantly ahead on occupancy with flat pricing.  Recent book volumes are meeting expectations at nicely higher prices
  • Better FY NCC ex fuel guidance due to lower occupancy and greater collaboration amongst brands.
  • 2Q better yields (4 cents), improved cost guidance (6 cents), improved fuel consumption/items (4 cents), unfavorable currency/fuel (-6 cents)

Q & A

  • 3Q yield:  very small movement from a tad positive into slightly negative at this point.  More promotional environment in Caribbean than anticipated.  Carnival brand decides to hold price and give up occupancy; lower occupancy driving yields down.
  • EAA brands moving in positive direction
  • Capacity in Caribbean:  +22% (3Q), +13% (4Q)
    • For CCL, capacity in 4Q is only +5-6%  in Caribbean, compared with +19% in 3Q
  • Yields will be up slightly in Q4
  • Opportunities in reducing air expenses; fully expect to begin to see benefit in 2015
  • Ticket revenue at EAA brands performed a little bit better than expected.
  • Onboard Casino program doing well; didn't change onboard revenue for remainder of year despite lower occupancy because of improvements that they're seeing.
  • Lower occupancy in Caribbean, Japan, and other things impact 3Q yields
  • 3Q guidance a little worse than CCL anticipated
  • 3Q NA yields will not be worse than -7% seen in 2Q
  • Annual strategy reviews in Aug/Sept
  • 2015 capacity growth: little over 2%
  • Biggest promotional activity has been in south Florida market; making deployment changes
  • 2015 overall capacity increases will be in Asia/Australia/New Zealand
  • 2015 Industrywide:  where NA brands exist, flat capacity; where EAA brands exist, capacity +6%.  Asia-Pacific region will grow 16% for industry.
  • Carnival brand:  image has rebounded very well. 
  • But overall rebound has not been what mgmt had hoped because of Caribbean promotions.
  • Held price at expense of occupancy worked well last year
  • Ex payroll/fuel:  1% cost improvement yields $60 million
  • Costa:  continue to improve a few more points than prior year
  • Can see yield improvement in Caribbean at some point.  Inflection point in 3Q moving to 4Q.
  • Onboard:  positive signs in multiple categories but casino revenue growth most significant
  • Costa strong in Spain
  • China: overall yields slightly less than corp average.  Chinese love gambling but drink less.

NEW HOME SALES = MAY FLOWERS

Takeaway: The New Home Market shows signs of life in May, but pricing trends in the existing home market continue to weaken.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 

 

NEW HOME SALES = MAY FLOWERS - Compendium 062414

 

Today's Focus: May New Home Sales & April Case-Shiller and FHFA

 

May New Home Sales - Key Takeaways

* Solid report as New Home Sales increase +75K sequentially (+18.6% MoM) in May, with the YoY reversing to +17% after three consecutive months of negative YoY growth.

 

* All regions showed positive accelerations in sales – most notably, the Northeast region saw YoY Sales improve to +36% YoY in May after negative year-over-year growth of -39.5%, -18.2%, and -31.3% over the February-April period. 

 

* Inventory:  New Homes for Sale increased to 188K from 187K prior – an increase of +0.5% MoM and +16% YoY. 

 

So, for reasons we’ve highlighted previously (QM, Investor Demand, Student Loan debt & Lower tier income growth stagnation, etc), the new Home market continues to look better on balance than the existing market where the 750K+ tier remains the primary source of strength. 

 

NEW HOME SALES = MAY FLOWERS - New Homes SaleS Absolute   YoY   3Y

 

NEW HOME SALES = MAY FLOWERS - New Home Sales LT w Summary Stats

 

NEW HOME SALES = MAY FLOWERS - New Home Sales Regional 

 

NEW HOME SALES = MAY FLOWERS - New Home Sales Regional YoY   

 

NEW HOME SALES = MAY FLOWERS - New Homes For Sale Absolute   YoY   

 

 

 

April S&P/Case-Shiller Home Price Report (& FHFA) - Key Takeaways

The rearview report for April (effectively March data for CS) says…..

 

* All primary price indices telling a congruous story with price deceleration now in full effect across Corelogic, Case-Shiller & FHFA, with the deceleration accelerating in the latest readings.

 

* Case-Shiller:  decelerates 160bps sequentially to +10.8% YoY from +12.4% in March, the fastest rate of sequential deceleration since March of 2008

-          Prices decelerating across 19 of 20 cities with Boston the lone city registering sequential acceleration

-          Demand Model looking solid with case-shiller still tracking pending nicely on an 18-mo lag. 

 

* FHFA:  decelerates 60bps to +5.9% YoY from 6.5% in March, matching the fastest rate of sequential deceleration since October of 2011.

 

NEW HOME SALES = MAY FLOWERS - Case Shiller NSA TTM YoY

 

NEW HOME SALES = MAY FLOWERS - Case Shiller vs Pending Home Sales 18Mo Lag

 

NEW HOME SALES = MAY FLOWERS - Case Shiller NSA Index Level LT

 

NEW HOME SALES = MAY FLOWERS - Case Shiller Scatter Index Weight vs Price Growth

 

NEW HOME SALES = MAY FLOWERS - FHFA NSA TTM YoY

 

 

Bottom Line:

The Existing Home Market and New Home Market continue to bifurcate with the latter showing marginal signs of strength and the former continuing to cool. Pricing trends, however, are softening as falling demand in the existing market manifests as pricing weakness on a lag.

 


About New Home Sales:

Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.

  

About Case Shiller:

The S&P/Case-Shiller Home Price Index measures the changes in value of residential real estate by tracking single-family home re-sales in 20 metropolitan areas across the US. The index uses purchase price information obtained from county assessor and recorder offices. The Case-Shiller indexes are value-weighted, meaning price trends for more expensive homes have greater influence on estimated price changes than other homes. It is vital to note that the index’s printed number is a 3-month rolling average released on a two month delay.

 

Frequency and Release Date:

The S&P/Case-Shiller HPI is released on the last Tuesday of every month. The index is on a two month lag and therefore does not reflect the most recent month’s home prices.

 

 

Joshua Steiner, CFA

 

Christian B. Drake


Early Look

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Can the U.S. Consumer Handle the Pinch?

Following up on a note we published yesterday from the MACRO team on inflation we are publishing a chart that takes a broader look at consumer inflation trends.  It was pointed out to us yesterday that a fairly unique set of circumstances is leading to this bout of protein inflation – nothing cures high prices like high prices especially in commodity land.  This is certainly true in some respects, but the consumer inflation pinch is coming from multiple sources. 

 

Hedgeye’s MACRO GURU, Darius Dale, created an index that tracks food, fuel and utility inflation for the median consumer.  It’s a weighted average of the YoY and MoM percentage change in the monthly averages of the CRB Foodstuff Index (CRB FOOD Index), the American Automobile Association’s Daily National Average Gasoline Price Index (3AGSREG Index) and the iBoxx Electricity Price Index (IUTPELC Index). The weights are based on their respective shares of PCE (i.e. 12.45%, 6.39% and 8.28%, respectively).

 

Holding current prices flat, this index should accelerate towards +13-15% YoY by year’s end. On a MoM basis, the YTD pattern is tracking very similar to early 2008 and early 2011. While the “pinch” on consumer’s wallet isn’t as sharp in magnitude as it was in those periods, we’d argue that the consumer/economy may be in a similarly precarious position now. 

 

Can the U.S. Consumer Handle the Pinch? - z.  dd

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst 



Retail Callouts (6/24): ICSC, TGT, WMT, AMZN

Takeaway: ICSC numbers strong as 2Q nears close. No quick fix to problems that led to Steinhafel's ouster. TGT reworks shipping policy.

EVENTS TO WATCH

 

Wednesday (6/23)

  • BBBY - Earnings Call: 5:00pm

 

Thursday (6/24)

  • NKE - Earnings Call: 5:00pm

 

Friday (6/25)

  • FINL - Earnings Call: 8:30am

 

ECONOMIC DATA

 

ICSC - Chain Store Sales Index

 

Takeaway: Three solid weeks of data as the 2nd quarter nears a close. Numbers have looked much better over the last 12 weeks compared to the start of the year. QTD growth rate up 20bps from last year.

 

Retail Callouts (6/24): ICSC, TGT, WMT, AMZN - Chart 1 6 24 2014

 

COMPANY NEWS

 

TGT - Retailer Target Lost Its Way Under Ousted CEO Gregg Steinhafel

(http://online.wsj.com/articles/retailer-target-lost-its-way-under-ousted-ceo-gregg-steinhafel-1403577233)

 

  • "Just days before Chief Executive Gregg Steinhafel resigned from Target Corp., a small group of senior executives huddled together to discuss ways to improve the flagging retailer's fortunes. Shortly after their gathering on May 2, executives delivered a message to the board: If Mr. Steinhafel didn't leave immediately, others would. The following Monday, the CEO was out."
  • "The sequence of events, according to people close to the situation, was the climax of a tense narrative that had been playing out within Target's top ranks...interviews with more than two dozen former and current Target executives, managers and vendors reveal a deep malaise within a chain that, increasingly, had lost its way. Management became mired in a new thicket of bureaucracy. Creative leeway—once the DNA of the chain affectionately dubbed 'Tar-zhay'—took a back seat to rigid performance metrics."
  • "Mr. Steinhafel held the view that online purchases risked cannibalizing sales from visits to physical stores, say former employees. It wasn't until 2009 that Target embarked on a plan to build its own website, an effort it called 'Project Everest.'"

 

Takeaway: Target's decision to enter Canada and the data breach are polarizing events which helped catalyze the coup documented here. But, that was the climax of a series of misguided initiatives that guided TGT away from its core. As CEO during this time period, the blame falls squarely on Steinhafel's shoulders - right or wrong. We give the existing management team credit for realizing that change needed to be made. But, in order to fix the structural issue inside the company it’s going to cost money…lots of it. There are no quick fixes to the underlying problems (P-Fresh, RedCard, e-commerce) if the company wants to drive long term profitability.

 

TGT - Target further incentivizes customers to shop online

(http://www.retailingtoday.com/article/target-further-incentivizes-customers-shop-online)

 

  • "Target is giving customers added incentive to shop online by offering free shipping for all orders of $50 or more. The new policy, which takes effect immediately, excludes oversize and heavy items, which will be subject to a handling fee."
  • “'We’ve heard from guests they don’t fully understand our shipping policy — so we’ve changed it to make it simpler and reduce the friction in making purchases on the site,' said Jason Goldberger, SVP, Target.com and Mobile. 'Providing our guests a better free shipping offer is just one of the many ways we continue to improve the Target.com experience.'”

 

Takeaway: Target already offered free shipping on orders over $50, but the number of items eligible was limited. This now unifies TGT's shipping policy and puts it in line with its peers. Here's how TGT stacks up to AMZN and WMT. AMZN - free shipping for Prime members and orders over $35. WMT - free shipping on orders over $50 (6-9 day delivery window). TGT - free shipping for RedCard member and items over $50 (3-5 day shipping window). We can't imagine that WMT lets TGT hold the advantage for long.

 

OTHER NEWS

 

WMT - Wal-Mart Appoints 13 Merchandising Executives in Shake-Up

http://www.bloomberg.com/news/2014-06-23/wal-mart-appoints-13-merchandising-executives-in-latest-shake-up.html)

 

  • "Wal-Mart Stores Inc. (WMT), the world’s largest retailer, named 13 executives to its U.S. merchandising operations, marking the latest shake-up since Chief Executive Officer Doug McMillon took the reins in February."
  • "As part of the changes, Scott Huff will be promoted to executive vice president overseeing merchandising operations for the U.S., according to a company memo sent by U.S. Chief Merchandising Officer Duncan Mac Naughton. Huff has been at Wal-Mart since 1994, when he started as an intern. Seven of the 13 executives named are women."


M - Macy’s adds Starbucks exec to board

(http://www.retailingtoday.com/article/macy%E2%80%99s-adds-starbucks-exec-board)

 

  • "Macy’s has added Annie Young-Scrivner, EVP of Starbucks Coffee Company and president of its Teavana business, to its board of directors."
  • "The addition of Young-Scrivner brings the size of Macy's board to 11 members. Of the 10 independent directors, five are women."

 

APP - American Apparel's Dov Charney Fighting Back

(http://www.wwd.com/business-news/human-resources/dov-charney-fighting-back-7754085?module=hp-topstories)

 

  • "A filing with the Securities and Exchange Commission Monday detailing Charney’s position said his termination was 'without merit' and that he 'intends to contest it vigorously.' He is working with Los Angeles law firm Glaser Weil Fink Jacobs Howard Avchen & Shapiro."
  • "After Charney was sidelined — he was technically suspended for 30 days to await termination — he was approached by 'certain people, including stock holders…who expressed support for his continued leadership' of the company, according to the filing."
  • "Charney’s been holding discussions with these people about 'potential changes to the composition of the board and management of [American Apparel].'"

 

UA - Sprint Teams with Samsung, Under Armour and MapMyFitness to Drive Advances in Growing Health and Fitness Technology Market

(http://newsroom.sprint.com/article_display.cfm?article_id=11468)

 

  • "Sprint is stepping up its presence in the growing health and fitness markets, announcing today the launch of an exclusive device from Samsung Telecommunications America and a collaboration with health and fitness market leaders Under Armour and MapMyFitness to offer mobile solutions for today’s active lifestyles."
  • "Sprint will provide convenient mobile access to fitness tracking, educational information, and music, as well as offer applications to help consumers as they exercise, watch what they eat and take better care of themselves."

 

NKE, ADDYY - Wimbledon’s stricter dress code isn’t meshing well with sports brands

(http://blogs.marketwatch.com/behindthestorefront/2014/06/23/wimbledons-stricter-dress-code-isnt-meshing-well-with-sports-brands/)

 

  • "While Wimbledon first stipulated in 1963 that all competitors have to dress 'predominantly in white' on the court, then changed it in 1995 to 'almost entirely in white,' this year the players have been given an even clearer mandate: accessories such as undergarments, headbands, and wristbands are now also included in the mandate."

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