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It was no surprise when OEH missed estimates on last week.  We still think Street estimates are too high for the balance of the year, as well as for 2010 but what is the real value?



“The Company plans to make further disposals of non-core assets in the coming quarters as we continue to deleverage the Company in line with our target and reach a four to five times ratio of debt to average EBITDA by the end of 2011.” – OEH Management 


Despite another quarter of terrible numbers and a seemingly outrageous valuation of 18x 2009 EV/EBITDA, we believe that if the company is serious about monetizing some of its assets, the real value of the company may be higher.  As we wrote about in “NAV: WHO CARES?” on 06/10/2009, given the dearth of transactions at the upper upscale and luxury end, change in the “traditional” set of real estate buyers, lack of financing, and the uncertain timing of any recovery, per key (Net Asset) values are difficult to determine.  However, our best crack is that OEH’s NAV lies somewhere north of $11/share.


We think that potential buyers of trophy assets (like the Cipriani) would be willing to pay a price that provides a break-even scenario in the first few years as fundamentals recover.  On the 2Q09 call, OEH discussed selling up to 8 properties to help de-lever the company over the next 2 years.  Below is our attempt to try to quantify the proceeds of some potential assets sales. 


Windsor Court, which is under contract, and the Bora Bora asset are currently in the process of accepting bids.  OEH did not specify the sales price for Windsor Court other than stating that proceeds will materially exceed the $37MM mortgage on the property.  Our best guess is that Windsor Court will fetch $45MM -$50MM, or between $140-150k per key.  Bora Bora was purchased by Orient Express in March 2001 for $19.6MM.  We also believe that there is some land that comes with the asset.   We think that OEH should be able to get more than the initial purchase price - perhaps $30MM.


Other assets that we expect to come on the block include:

  • The Grand Hotel Europe
    • 2007 EBITDA of $21MM, 2008 EBITDA of $23.6MM, 2009E EBITDA of $13MM
    • Rates are in roubles, so the hotel took a huge hit this year after an unusually good year in 2008 when the rouble depreciated about 27.5% against the dollar in the 1H09
    • This is the largest EBITDA producing asset in OEH’s portfolio with 300 keys
    • Since the Russian economy is levered to oil, a recovery in prices could help them sell this asset at north of $200MM and perhaps closer to $230MM
    • Selling a majority stake in the asset is also a possibility
    • Given the volatility of the Russian market, we don’t think this asset is high on the list of for sale properties
  • Hotel de la Cité
    • With 61 keys located in Carcassonne, France, this asset is located in a “day trip” market which OEH mentioned was suffering the most in the current environment
    • 2007 EBITDA was $0.9MM, 2008 EBITDA was $0.1MM… our guess is that they are loss making this year
    • Our best guess is that this asset would fetch about $20-25MM
  • Keswick Hall & Inn at Perry Cabin
    • We believe that OEH would love to sell these assets, but the market just isn’t there now.   However, they fit the bill of “weekend getaway” markets
  •  Westcliff Hotel
    • Located in Johannesburg, South Africa, this asset is not key to the portfolio
    • Most of the customers that go on the OEH safaris stay at the airport hotel in Johannesburg so there’s not a lot of synergy with the Westcliff
    • We think OEH would sell this asset for a bid of $20-25MM
  • Lilianfels Hotel
    • Located just outside of Sydney, Australia in the Blue Mountains National Park
    • Another day tripper hotel
    • Best guess at value: $20MM
  • Pansea Porfolio               
    • We think that at least one of these assets will be up for sale in the next two years

What's Next? Monkey Time...

I love my banana.


Now the Fibonacci Monkeys are going to be chasing the 200-day Moving Monkeys and we’ll eventually get overbought.


What’s next?


The SP500’s immediate term resistance is 1,018 (a higher-high, and YTD high). After I we watch the monkeys fling’em at that line, we’ll make a new call from there. Provided that the US Dollar continues to be compromised, my intermediate term level of 1,041 resistance has every reason to be realized. The nightmare scenario for those who tried to call a crash again (AFTER the 4-day correction), is a SP500 futures picture of up 10-15 handles in the morning.



Keith R. McCullough
Chief Executive Officer


What's Next? Monkey Time...  - bananas

Game Time YouTube: Bernanke Burns The Buck

Our Game Time call was that he would pander – he just pandered.


There was no signal of raising rates – explicitly or rhetorically. Bernanke said the Fed is going to “gradually slow the pace” of buying UST Bonds, but that’s just a political plug.


Per Wikipedia: to pander means, “in politics, portrayal of one's views to fit in line with a certain crowd of voters the candidate is attempting to impress.”


Ben Bernanke is pandering to the political pressures associated with getting a core constituency paid: Bankers, Debtors, and Politicians. He is hostage to his own personal history (studying depressions) and those savvy politicians who understand how to use that personal history as a backboard for their compromised agenda.


While, in the long run, this doesn’t end well for those paying the bills (US consumers via inflation and the Chinese holders of US Debt), in the immediate term you should continue to focus on how you can get paid. Just understand the dynamics of US Dollar Devaluation, and capitalize on it.


The US Dollar is down on the day, and everything priced in those dollars is up.



Game Time YouTube: Bernanke Burns The Buck - bern


Retail: Destocking Over?

Inventory destocking and clean-up across the supply chain appears to be at an inflection point now that the majority of the branded apparel and footwear vendors have reported 2Q results.  The chart below shows branded apparel and footwear sales to inventory spreads over the past several quarters vs. the trend at Macy’s (one of the largest sellers of all these goods).  Yes we know that most vendors have become less and less reliant on the department store channel, but with the dominance of Macy’s market-share in branded retailing, it’s still worth a look. We’ll have a better picture of this over the next week or two when every other retailer reports 2Q inventories, but for now it is clear that the delta on sales/inventory is getting better on the margin. 


The bottom line here appears to be that this is good for most links in the supply chain.  But we can’t improve this delta (hence boosting Gross Margin) by simply shrinking inventories forever. At some point, companies are going to have to actually buy inventory if they care to grow their respective businesses. This actually smells a little like Wall Street to me, where many people are not ALLOWED to be bullish because they (or their PMs) are too afraid of being run over making a positive bet on a consumer discretionary company. At some point, retailers are going to have to start to open the gates. My sense is that this will be around Holiday. That’s also the time when we eye a period (Spring) where the delta on compares won’t be as easy, and companies will need to either benefit from, or suffer with, the capital deployment decisions made today.


Bottom line is that I still think that the Quality Trade returns in early 2010, and companies that are proactively preparing to grow their businesses for the New Reality will prove that today’s numbers are far too low (RL, BBBY, UA, and even Nike later in the year). PSS is in there – though I accept that it does not deserve the ‘quality’ label. Junk is as junk does. That’s WRC, GIL, and JNY. And yes, include ROST and TJX in there. I know everyone loves them and they’re not ‘junky,' but we’ll start to see quality of earnings and incremental ROIC head in that direction next year.


Retail: Destocking Over? - Sales Inventory Growth


Long Germany: EWG

As a follow up to Matt Hedrick’s thorough post on Germany vs. UK yesterday, we have been getting a lot of questions as to what this ETF holds.

Here’s the data:



Long Germany: EWG - ewg

Long Germany: EWG - chart

Long Germany: EWG - ewg3

Long Germany: EWG - ewg4



12 AUGUST 2009




Lots going on from an earnings standpoint this morning, and most is net positive. The key call out here is LIZ. The print is in line with pre-announcement, and inventories improved on the margin for the first time in a year (see SIGMA below). SG&A deleverage is still killing the numbers, but with another $100mm in cost reductions announced, this is a pretty big development given that LIZ struggled to print $126mm in EBIT last year (and will be around ¼ of that this year). Bears will point to continued weak comps and a big sequential deceleration in margins at Direct Brands. I’m OK with that given 1) the sequential acceleration on a 2-year basis, and the fact that inventories are finally getting better on the margin. Also, look for the company to discuss its recent covert initiatives (i.e. key hires) to fix Mexx. We don’t give it a ton of focus in the US, but keep in mind that Mexx is roughly the same size as the Liz Claiborne brand, and is operating at a loss. Heck, if they unwound any and all investments in Mexx it would be accretive to every key line of the P&L and cash flow statement. The stock is off in early trading. Quite frankly, I don’t get it. This was one of the first times we did not see a meaningful guide-down in 2-years. I think prior guide-down will prove to have been the last. People will be calling me when this stock is mid-high single digits asking if it is time to start doing the work on it.  I still like this one.






Some Notable Call Outs


  • While still in the early stages of development, Fossil is rolling out a men’s and women’s footwear line to compliment the company’s leather accessory and non-watch business. The men’s line launched this Spring in a limited amount of doors and was essentially a learning experience for the company. Women’s launched a couple of weeks ago and is seeing a strong initial response. Based on a strong read from the footwear show, Spring 2010 is expected to show substantial door growth for the women’s line.


  • Warnaco’s management repeated several times over the course of its 2Q conference call that the timing of some wholesale shipments have been moved out of 2Q into 3Q. Customers are taking product closer to need or the time of retail sale. Given the relatively low level of visibility at retail, we expect this trend to continue over the next couple of quarters.


  • We’ve seen many examples of retailers and consumer brands using Twitter to get closer to their core customers, whether it be with a trend update or a promotion. In an interesting twist, New York discount/off-price retailer Daffy’s is using Twitter to alert customers where their delivery trucks are and when they are arriving on the loading dock. Clever? Yes. Useful? Probably not. The Tweets have no specifics on what merchandise is on the trucks are if the inventory will actually make it out on the floor in a timely manner. Nonetheless, an interesting use of real time media to connect the brand with customers (and generate buzz at the same time).




-The British Retail Consortium (BRC) has forecast that the return of VAT to 17.5% on January 1 will cost retailers £90m, as the Conservative party refused to rule out raising VAT further if they come to power - Retailers spent £90m altering their prices and systems when VAT was reduced to 15% in December, and the BRC said that it will cost a similar amount to reverse the change by January. Shadow chancellor George Osborne has also refused to rule out increasing VAT further than 17.5% to rebalance public finance. According to The Daily Telegraph senior Conservatives are looking at the possibility of increasing VAT to 20%. Separately, the Office for National Statistics (ONS) has found that a third of retailers did not pass on the price changes to consumers following the reduction in VAT in December. The ONS said that while 43% of shops applied the price change and 14% changed all prices marked on the shelves, 9% used a combination of the strategies. <drapersonline.com>


-Escada AG must file for bankruptcy after failing to achieve 80% acceptance of bonds - Having failed to reach the targeted 80% acceptance level for its bond exchange offer, Escada AG has reiterated plans to file for insolvency later this week. German law does not have the equivalent of Chapter 11, and planned insolvency is the closest procedure to bankruptcy. Late Tuesday night, the German fashion house said the bond exchange offer, which expired at 3 p.m. German time on Tuesday, achieved only a 46% acceptance rate. <wwd.com/business-news>


-CIT Group Inc. has two stress-inducing deadlines looming on the horizon - Friday, for a debt tender offer, and Oct. 1, for a restructuring plan. In a regulatory filing Tuesday with the Securities and Exchange Commission, CIT said the first steps of its restructuring plan are to complete a tender offer for its outstanding $1 billion in senior notes due Monday. It already reached an agreement with major bondholders for a $3 billion secured term loan facility, which has been drawn down. Presuming the tender offer is successful, neither CIT nor the steering committee of the bondholder lending group intends to file for Chapter 11 bankruptcy court protection. However, if the tender offer is not completed and the firm is unable to obtain alternative financing, the company said it would be in default under its credit facility and “could seek relief” under the auspices of the bankruptcy court. CIT previously said it had received enough offers, or 58% of the debt to be tendered, to complete the repurchase program. The tender offer expires Friday. <wwd.com/business-news>


-The NPD Group Tuesday added to the growing body of evidence that this year’s back-to-school season will be late and lean - NPD reported 44% of those surveyed said they would spend less this b-t-s season than they did a year ago, while 32% expect to spend the same and 23% foresee greater expenditures. Last year, 35% expected to spend less, 34% the same and 31% more. Although still the second-most critical category behind school supplies, apparel is a lower priority this year than last, with 52% of respondents expecting to purchase it versus 60% last year. Footwear was down to 39% from 48%, but held the number-three spot in order of priority. Apparel accessories fell to 16% from 20%, and beauty products declined to 13% from 17%. <wwd.com/business-news>


-After seeing heavy markdowns and few profits in recent years, the market now is about to lose one of its premier names and major anchors: Ellen Tracy - Under a new operating license with RVC Enterprises, Ellen Tracy plans to morph into a better sportswear player, taking its prices down considerably and competing with firms such as Michael Michael Kors, Lauren by Ralph Lauren, Jones New York, Calvin Klein white label, Liz Claiborne and AK Anne Klein. Sources indicated that Ellen Tracy is talking with several major retail groups, namely Macy’s, Dillard’s and Lord & Taylor, about an exclusive sportswear arrangement.  The company’s plan to exit the bridge floor has put major real estate in limbo at key accounts such as Bloomingdale’s, Saks Fifth Avenue, Neiman Marcus, Nordstrom, Dillard’s and Lord & Taylor — and is a further blow to a brand that was once the undisputed leader of the category, with sales of more than $170 million at wholesale at its peak.  <wwd.com/retail-news>


-AVP Pro Beach Volleyball and Crocs Inc. will part ways in 2010 after a longstanding partnership - Crocs has bought out the remainder of its contract with the domestic professional beach volleyball tour <sportsonesource.com>


-adidas America, Inc., announced a long-term extension of its relationship with Agron, Inc. - Argon is adi's exclusive licensee for headwear, bags, socks, underwear, and other accessory items. The extension through 2022 will expand the two companies’ successful partnership offering a strong portfolio of accessories. <sportsonesource.com>


-Macy’s has teamed up with Feeding America to launch a celebrity-studded fall campaign that links the eat-at-home trend with hunger relief - The campaign, called “Come Together,” asks consumers to host dinner parties and have guests make a donation to Feeding America instead of the usual host gift. Macy’s is matching all contributions until a total of 10 million meals is reached. The retailer has tapped celebrities like Jessica Simpson, Queen Latifah and Tommy Hilfiger to star in the campaign. One spot breaking in mid-September shows the A-listers seated for a meal—inside a Macy’s store—that’s “peppered with the usual and unexpected twists and turns that occur at all great gatherings,” per the company.  With the eat-at-home trend holding steady, however, Macy's saw an opportunity to link the trend with cause marketing. “Come Together was designed with two goals in mind: To create special moments in our customers’ own homes this fall by bringing friends and families together over a meal, and in turn, to raise meals for an incredible cause that is feeling the real side effects of today’s economy,” said Robin Reibel, Macy’s group vp of cause marketing and public relations.  <brandweek.com>


-An exclusive line of Marvel-inspired T-shirts and more for boys and toddlers have arrived at Old Navy stores in the U.S. and Canada - Just in time for the back-to-school season, the collection includes tees, hoodies and outerwear featuring Spider-Man, The Incredible Hulk, Iron Man and X-Men. Fans will also receive a limited-edition Amazing Fantasy No. 15 comic book with the purchase of a Marvel collectible T-shirt. "We are excited to continue our successful relationship with Old Navy and celebrate Marvel's 70th anniversary with a leading retail brand," says Paul Gitter, president of consumer products for Marvel Entertainment in North America. "This partnership reinforces our overall strategy to build exclusive relationships and merchandising programs that open up new channels of distribution for Marvel, enabling us to further maximize the exposure for our brands." <licensemag.com>


-A military footwear manufacturer will bring more than 100 jobs when it opens a new plant in the Morristown Airport Industrial District month after next - Wellco Enterprises, a manufacturer of footwear for military, tactical, industrial and outdoor applications will open its new plant in the former BOS Automotive Inc. building. Lee Ferguson, Chief Executive Officer of Wellco’s parent company, Tactical Holdings Operations Inc. announced the new manufacturing project which will realize a capital investment of $8 million in building and equipment. "We have had a very long, slow period in the economy, and too many people have lost jobs during this recession," said chamber chair Lynn Elkins. <timesnews.net>


-Last week in Akron, when LeBron James unveiled the Air Zoom LeBron VII, he expressed his happiness with his decision to sign with Nike in May 2003 - “I looked at it like I was going to be in a position with a great company, where I can help hopefully business with them and they can help me," James said. And now, seven years later, it’s been everything I’ve expected.” The question is, as James' Nike contract comes to an end after this season, was it all that Nike expected when they signed him 2,273 days ago. The answer is no. When Nike signed James they agreed to guarantee him some $13 million a year, which would have only been worth it if he turned into the next Michael Jordan. But while James has somehow lived up to the hype on the court, he hasn’t really done so off the court.  Much of it is not his fault. It’s just that it’s LeBron himself who has proven that there is no next Michael Jordan. In LeBron, we finally had the perfect test case. The most glorified high school basketball player of all time who somehow lived up to all expectations. And yet, even he couldn’t sell gear or shoes like MJ did. So the question is how much does Nike pay LeBron for his next deal? Some might suggest James has some leverage in that he could sign his next deal with the Knicks, which would literally put him on Madison Avenue. But, trust me, location doesn't sell as much as championships do. <cnbc.com>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): PSS, PETM


08/11/2009 10:56 AM


Here's a name that McGough doesn't necessarily like for the quarter, but likes it for the intermediate term - and I like at this price. Buying red. KM


08/11/2009 10:03 AM


Buying the red associated with the JPM downgrade. McGough and Levine's read on this upcoming quarter is that margin expectations are too low. KM




RL: Roger Farah, President and COO, sold 99,458shs ($6.8mm) nearly 40% of common holdings.

JCG:  Mickey Drexler, sold 58,074shs ($1.7mm) less than 5% of total common holdings.


  • David Nichols, Executive VP, sold 100,000shs ($1.1mm) after exercising the right to buy 100,000shs roughly 30% of common holdings.
  • George Powlick, VP of Finance, CFO, sold 30,000shs ($323k) after exercising the right to buy 30,000shs roughly 20% of common holdings.

BGFV: Michael Brown, Director, sold 750shs (~$11k) nearly 12.5% of common holdings.







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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.