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MAR 2Q 2014 CONFERENCE CALL

Offsetting a nice all around quarter is high expectations and slightly disappointing NA RevPAR relative to Smith Travel data

 

CONF CALL

  • 35% increase in development support team
  • While MAR continues to see little new full-service hotel construction in the US, they are getting their fair share
  • MAR flags account for 30% of the roughly 50 upper upscale and luxury branded hotels currently under construction in the US, more than any competitor.
  • Picked up a significant number of rooms with a pretty acquisition, but even excluding the impact of that transaction, room signings are up 45% this year. 
  • Despite tremendous North American growth, there is no need to panic. 
  • Strength of NA pipeline is indication of an overcharged industry supply
  • A number of Ritz-Carlton, Marriott, Renaissance Mac and Courtyard hotels is growing in China while construction pace and China remains on track, deals are taking longer to execute as they concentrate their development efforts in large secondary markets in the West.  
  • Development is particularly strong in Brazil and Mexico. 
  • Bullish about conversion opportunities in Europe, particularly for Autograph brand.
  • Now estimate 2014 room growth of 7% gross or roughly 6% net of dilutions. 
  • NA REVPAR
    • Impressive REVPAR growth of 6% despite Easter impact of -1%
    • Western US particularly strong; improving trends in Eastern US
    • RevPAR greater Washington exceeded expectations, rising 2%. RevPAR in greater New York increased over 3% despite significant supply growth in the city. 
    • Group demand is looking very good. Marriott Hotel group bookings made in the second quarter for the next 12 months increased 8%.
    • For meetings that took place in the quarter, attendance exceeded expectations, and cancellations were below trend.
    • Marriott hotel brands reported group RevPAR of roughly 3% in the quarter, but MAR estimates it would have been up roughly 5% excluding the timing impact of the shifting Easter holiday.
    • For full-year 2014, group booking pace of the Marriott brand in North America remains up about 5%.
  • Caribbean/Latin America
    • Systemwide REVPAR +11%; strong demand from World Cup
    • For the full year 2014, excluding the Venezuela, MAR modeling high single digit RevPAR growth for the Caribbean and Latin America.
  • Asia-Pacific
    • RevPAR in the Asia-Pacific region increased 5.6% in the quarter.
    • RevPAR growth was strong in Japan and Indonesia, offset by lower year-over-year RevPAR in Thailand. 
    • RevPAR in greater China rose over 7%; Shanghai RevPAR increased double digits.
    • Expect RevPAR in the Asia-Pacific region to increase at the mid-single-digit rate for the full year.
  • Europe
    • Expect Europe's RevPAR to grow at a low single digit range
    • ME&A: RevPAR: +4.9%, a bit ahead of expectations
    • For the full year, MAR expects comp hotels in the Middle East and Africa region to increase RevPAR at the mid-single-digit rate, reflecting easier comps for Egypt later in the year.
  • Incentive fees 2014:  high teens growth rate
  • Looking ahead, P&L will benefit from lower development costs of the Miami residences as these contracts close
  • Group booking pace is very strong in the third quarter.  4Q pace is less robust given the unfavorable shift in the timing of holidays in the fourth quarter. 

 

Q & A

  • Not concerned about STR comparison - what matters to them is RevPAR comparisons to the competitive set in each market where MAR is outperforming on average year to date
  • Increased capital return target by $100m because they did additional debt capacity, growth in EBITDA
  • Transient expected to be strong in 3Q/4Q
  • Group is meaningfully weaker in 4Q
  • RevPAR will be higher in 3Q vs 4Q because of group
  • More hotels paid incentive fees in 2Q (40% vs 34% in prior year); 2/3 were international
  • Committed to lower G&A
  • Q2 group business booked for next 12 mths:  +8%
  • Q2 group business booked 13-24 mths:  +8%
  • Group bookings pace for 2014:  +5%
  • Group bookings pace for 2015:  maybe a little lower than mid single digit
  • July/August huge months for group
  • Want to maintain BBB rating:  around 3x leverage
  • Incentive fees:  20% of domestic hotels pay; international hotels in the teens
  • Venezuela:  very lumpy market; very hyperinflationary; total investment will be $10 million
  • 2H 2014:  Some integration costs will be incurred due to Protea. There are probably two major cost items that we have in the second half timing that are different than the first half.

EHTH: Thoughts into the Print (2Q14)

Takeaway: Bad news is mostly on the table, but we're expecting a guidance cut on the release. Stock has taken a beating, so downside may be limited.

KEY POINTS

  1. MOST OF THE BAD NEWS ON THE TABLE: Many of the headwinds we were expecting for 2014 are already on the table.  Attrition all but negated the 1Q14 surge in Individual & Family Plan (IFP) new membership growth.  Additionally, management suggested that application volumes will be down y/y from 2Q14-3Q14.  EHTH is down over ~40% since we initiated the short position, and we are running out of near-term catalysts, so we will be evaluating the position after the print.
  2. LINGERING 2014 RISK: The lingering tailwind that EHTH has going for them in 2014 is the flow-through of late 1Q13 applications before the Open Enrollment deadline.  However, the deadline could prove to be a headwind as well.  EHTH may have lost additional members who were looking for subsidized plans on the Government Exchanges (EHTH had limited ability to sell those plans in 2014).  For perspective, HCA Holdings, which is the largest hospital system in the US, said yesterday during its earnings call that only 40% of its Exchange patient volumes are coming from the newly-insured.  That means 60% already had insurance, some if not, most of that is coming from private exchanges (e.g. ehealthinsurance.com).  The quarter and guidance could go either way, but we suspect a guidance cut is the most likely scenario.  
  3. MAJOR RISK IN 2015: What no one on the sell-side is talking about is Individual & Family Plan (IFP) commission rates next year.  The private exchanges (e.g. EHTH) are becoming more obsolete now the government exchanges are operational, which wasn’t the case heading into the 2014 Open Enrollment period.  The mix of new lives on the exchanges in 2014 are older (costlier) than historical experience, meaning Managed Care Companies (MCOs) need to find ways to recoup profitability next year.  Of all options available to MCOs, cutting IFP commission rates will be the path of least resistance.

Let us know, if you have any questions, or would like to discuss further. 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


BOOKING A MODEST GAIN IN NEW ZEALAND

Takeaway: As far as 2014 is concerned, the peak rate of improvement in New Zealand’s GIP fundamentals is now in the rearview mirror.

On JAN 30th, we introduced a long bias in the iShares MSCI New Zealand ETF (ENZL) under the guise of:

 

  1. A likely Quad #1 setup for the balance of 1H14: Looking to the subsequently reported data, real GDP growth accelerated to +3.1% YoY in 1Q form +2.2% prior, which was good for the fastest rate of growth in two years. CPI decelerated to +1.5% YoY in 1Q from +1.6% prior; it rebounded back to +1.6% in 2Q.
  2. Commodity reflation exposure: Looking to subsequent market performance, the CRB Commodity Index has appreciated +4.5% since then, inclusive of a +10.4% rip to its JUN 20th YTD high.
  3. Likely NZD/USD appreciation amid a then-outlook for tighter monetary policy: Looking to subsequent monetary policy adjustments, the RBNZ became the first DM economy to tighten monetary policy in the YTD by hiking its benchmark OCR +100bps from an all-time low of 2.5% in consecutive meetings from MAR-JUL.

 

Since then, the ETF has appreciated +7.5%, which has underperformed both the S&P 500 (SPY) – up +9.9% since then – and the MSCI World Index (URTH) – up +7.9% since then. Not terrible, but not our best work either; we obviously prefer to beat beta with our macro ETF recommendations.

 

Moving along, with the index fund recently breaking our immediate term-TRADE line of support (now resistance) amid a deteriorating fundamental outlook, we see no reason to stay involved on the long side at the current juncture.

 

BOOKING A MODEST GAIN IN NEW ZEALAND - 3

 

Looking to the fundamental picture, two developments provide cause for alarm: 

 

  1. Slowing high-frequency data pointing to a dour intermediate-term growth outlook: Looking to the table below, it’s easy to see that the vast majority of New Zealand’s [very detailed] survey, credit and export data are showing clear deterioration from a 3M, 6M and 12M trend perspective. That, coupled w/ the lagged effects of tighter monetary policy should put New Zealand squarely in Quad #4 for the third quarter, which is not particularly exciting for an equity investor in the absence of rate cuts or QE.
  2. RBNZ currency intervention: After the fourth +25bps hike last Thursday, RBNZ governor Graeme Wheeler stated that, “The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.” This verbal intervention in FX markets comes after the threat of actual intervention in MAY, amid the following commentary: “The exchange rate is unjustifiably high because it has failed to respond to a slump in dairy prices.” While he may be merely jawboning to a large degree, FX investors clearly do not think that is the case. The NZD has fallen -305bps vs. the USD MoM, the third worst spot return over that duration across the 32 expanded major currencies tracked by Bloomberg. It’s also worth nothing that Wheeler has the full support of Prime Minster John Key in this initiative to weaken the NZD. Needless to say, he does not have ours.

 

BOOKING A MODEST GAIN IN NEW ZEALAND - NEW ZEALAND High Frequency GIP Data Monitor

 

BOOKING A MODEST GAIN IN NEW ZEALAND - NEW ZEALAND

 

All told, we think it pays to book the gain in New Zealand here. If you’re looking for places to put your money, our favorite ideas on the long side of Asia/Oceania remain:

 

  1. “Old China”: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
  2. India: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
  3. Indonesia: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
  4. Taiwan: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE

 

Happy hunting,

 

DD

 

Darius Dale

Associate: Macro Team


Early Look

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LO – blu E-cig Sales -35% Drag Results

LO’s Q2 results missed on the top and bottom lines (Revenue $1.30B vs consensus $1.34B and adjusted EPS $0.84 vs consensus $0.88).  Its e-cig business blu was the material drag on the quarter, with sales of $37M down -35.1% Y/Y and an operating loss of $23M (reported) or $17M (adjusted), showing underperformance accelerating over the last 3 straight quarters. 

LO – blu E-cig Sales -35% Drag Results - z. lo

 

What We Liked. LO showed why it’s an industry leader in the tobacco industry with continued strong performance from the Newport brand and menthol. In the quarter the company was able to take 6.0% in cigarette pricing (a large number, yet similar to its peers of RAI and MO in the quarter), and outperformed the industry on a volume basis, declining -3.4% (versus an estimated -5.5% for the industry).   On the positive side, total LO retail market share in the quarter increased 0.2 share points to 15%; Newport retail share rose 0.3 pp to 12.8%; and Newport’s share of the U.S. menthol market rose 0.2 pp to 37.1%.

 

What We Didn’t Like. Despite noticeable slowing trends in the traditional (“cig-alike”) e-cigarette category in measured channels over recent months, blu’s underperformance in the quarter is notably weak!  Yes the company spent $8M in the quarter to launch blu (UK), rebranding SKYCIG that it bought in October 2013, but given the increased competition from national e-cigarette launches from MO (MarkTen) and RAI (VUSE) in recent months, 2H is looking increasingly challenged for blu domestically, especially given what will be an highly promotional environment to encourage adoption.  

 

In the quarter blu lost 1.1 in share points, maintaining a domestic leading dollar market share in e-cigs of 40.9% (for the 13 weeks ending July 5, 2014 according Nielsen data), but we think that LO/RAI might just be pleased with its plan to sell blu to Imperial (for more on the RAI deal and divestiture to Imperial see Removing Long LO from Best Ideas List).

 

To say the least, blu has underperformed our expectations for a rebound in 1H 2014 after a weak Q4 2013. As we’ve written about, we attribute the weakness to strength in larger vaporizers (tank/pens/mods/open systems/etc) that are primarily being sold in non-measured channels like vape shops and online. Their appeal is driven on a superior vapor quality, battery life, and lower price versus cig-alike products, the format sold by Big Tobacco, including blu. We expect these consumer trends, along with increased competition within the category given the launches of VUSE and MarkTen to continue to pressure blu’s results.

 

We removed LO from the Hedgeye Best Ideas list on the long side on 7/15/14 following the announcement of RAI to acquire the company.


Of note is that LO opted not to hold a conference call on the quarter, likely related to the announcement of RAI’s intention to acquire the company.  

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst


Retail Callouts (7/30): WMT, TGT, LULU, WWW, MW, UA, AMZN

Takeaway: WMT signs tech deal #14. Latest web traffic data crushing TGT. We take the other side of Barron’s being down on LULU LBO. WWW debt upgraded.

EVENTS TO WATCH

 

Wednesday (7/30)

KER - Earnings Call: 12:00pm

WFM - Earnings Call: 5:00pm

 

Thursday (7/31)

GIL - Earnings Call: 8:30am

SHOO - Earnings Call: 8:30am

 

 

COMPANY HIGHLIGHTS

 

WMT - Wal-Mart on the Prowl to Boost Web Expertise

(http://www.wwd.com/media-news/digital/walmartlabs-brings-on-luvocracy-7816046?module=hp-topstories)

 

  • "The retailer, which has become one of the most voracious dealmakers in tech, said Tuesday that it would buy social marketplace Luvocracy through its @WalmartLabs research and development arm.
  • "The deal marks the unit’s 14th acquisition and another signal that the world’s largest retailer plans to use all the tools at its disposal to boost its market share. Already about 245 million customers visit Wal-Mart’s 10,900 stores and its 10 Web sites each week."

 

Takeaway: Who would've thought that WalMart would end up as 'one of the most voracious dealmakers in tech? Don't be fooled, most of what WMT does in tech is to get better information and data to support growth in its physical stores. Nonetheless, WMT is winning the online battle against its top competitor, Target. The chart below shows the spread in internet traffic between the two -- specifically TGT traffic rank less WMT. In other words, over the past six months, there has been a dramatic shift in online share from Target to WalMart. That's what happens when your customer loses confidence in your ability to protect data.

 

Retail Callouts (7/30): WMT, TGT, LULU, WWW, MW, UA, AMZN - chart1 7 30

 

LULU - Barron's Nixes Potential for Lululemon LBO

(http://blogs.barrons.com/focusonfunds/2014/07/29/dont-hold-your-breath-waiting-for-lululemon-lbo/)

 

Takeaway:  When we added LULU to our Best Ideas List as a Long in June, we noted that the activist path being taken by Wilson would likely fail in its initial goal to regain control of the company, but that an LBO was highly unlikely. But in our note from earlier this month (link below) we pulled a 180 on the LBO component. The IRR makes sense right here, right now, as long as Wilson contributes his shares to the partnership and becomes a de facto creditor to the financial buyer. That would take leverage levels down to a level that's extremely manageable.

LINK: LULU - LBO MATH = DOWNSIDE SUPPORT

 

WWW - Moody's upgrades Wolverine World Wide's CFR to Ba2, upgrades senior unsecured notes to Ba3

(https://www.moodys.com/research/Moodys-upgrades-Wolverine-World-Wides-CFR-to-Ba2-upgrades-senior--PR_305029?WT.mc_id=NLTITLE_YYYYMMDD_PR_305029)

 

  • "Approximately $375 million of rated debt affected"
  • "'The upgrade reflects Wolverine's continued meaningful reduction in debt with net debt falling below $900 million at the end of the second quarter of 2014, its lowest level since the October 2012 acquisition of the Performance+Lifestyle Group (PLG)' said Moody's Vice President Scott Tuhy. He added 'Wolverine has now substantially integrated the PLG acquisition and we expect the Company will maintain stable to moderately growing earnings across its large portfolio of brands as a whole for the near to intermediate term.'"

 

Takeaway: Not a major deal, given this is only about a third of WWW's debt. But given that WWW is perhaps the most hated stock in retail (seriously -- it's sentiment scores are worse than JCP, and on par with SHLD and RSH), any positive change in debt rating is notable.

Retail Callouts (7/30): WMT, TGT, LULU, WWW, MW, UA, AMZN - Chart2 7 30

 

OTHER NEWS

 

TGT - Target clarifies national grocery price matching policy

(http://www.cbc.ca/news/canada/nova-scotia/target-clarifies-national-grocery-price-matching-policy-1.2721374)

 

  • "Target Canada is clarifying a major policy change on price matching, the retailer told CBC News Tuesday."
  • "Starting Tuesday, consumers can present digital flyers from selected online Canadian retailers and Target will match that price, confirms Lisa Gibson, spokesperson for Target Canada."
  • "Those retailers include Walmart.ca, Bestbuy.ca, Futureshop.ca, ToysRUs.ca, BabiesRUs.ca, CanadianTire.ca, Sears.ca and Amazon.ca."
  • "Target will also match any other retailers advertising in the local area. That means consumers can present a digital copy of a local ad or a digital copy of one of the selected online retailers. Target will meet or beat that price."

 

MW - MW Aims to Be U.S.' Top Men's Wear Retailer

(http://www.wwd.com/menswear-news/retail-business/mens-wearhouse-aims-to-be-biggest-7815447?module=hp-topstories)

 

  • "The Men’s Wearhouse Inc. has lofty ambitions — to become the largest seller of men’s apparel in the United States — but Wall Street has some doubts about the plan."
  • "Currently at number three behind Macy’s Inc. and Kohl’s Corp., the retailer is projecting sales of $3.7 billion by the end of 2017 as it works to absorb its former rival and latest conquest, Jos. A. Bank Clothiers Inc. Together, the companies had sales of $2.6 billion in 2013."

 

Fast Retailing - Uniqlo Opening First Chicago Store

(http://www.wwd.com/retail-news/mass-off-price/uniqlo-opening-first-chicago-store-7816105?module=hp-topstories)

 

  • "Uniqlo isn’t entering the Midwest quietly."
  • "Its first store in the region will be a 60,000-square-foot flagship at 830 North Michigan Avenue in Chicago, the Japanese retailer’s second largest store in the U.S. The Chicago unit is set to open in fall 2015 in the heart of the city’s downtown and part of the Magnificent Mile, where neighbors will include Topshop and H&M."

 

LB - World's 2nd Largest Victoria's Secret Flagship to Replace Montreal Chapters Bookstore

(http://www.retail-insider.com/retail-insider/2014/7/victorias-secret-montreal)

 

  • "The world's second largest Victoria's Secret location will replace Montreal's Chapters bookstore on busy Saint Catherine Street West. The 35,000+ square foot flagship will be located directly across the street from La Senza, owned by Victoria Secret's parent company."

 

AMZN, Flipkart - Amazon Invests $2 Billion in India to Challenge Flipkart

(http://www.bloomberg.com/news/2014-07-30/amazon-invests-2-billion-in-india-to-challenge-flipkart.html)

 

  • "Amazon.com Inc. (AMZN), the world’s largest online retailer, announced plans to invest $2 billion in its Indian operations just hours after local rival Flipkart Online Services Pvt. secured $1 billion from investors."
  • "The spending will support Amazon’s growth with India on pace to become the fastest market to reach $1 billion of gross sales, the company said in an e-mailed statement today."

 

RSH - Moody’s: RadioShack may run out of cash

(http://www.chainstoreage.com/article/moody%E2%80%99s-radioshack-may-run-out-cash)

 

  • "Financial woes continue for RadioShack, which was recently notified it is in danger of being delisted by the New York Stock Exchange. According to a new report from Moody’s Investor Service, RadioShack is likely to run out cash by the end of October 2015."

 

PETM - Jana Urges PetSmart to Pursue Sale Instead of Taking on Debt

(http://www.bloomberg.com/news/2014-07-29/jana-urges-petsmart-to-consider-sale-before-recapitalization.html)

 

  • "PetSmart Inc. activist investor Jana Partners LLC, ratcheting up its campaign against the pet-care chain, urged the retailer to put itself up for sale before “short-circuiting” its prospects by taking on debt."
  • "PetSmart has been considering changes to its capital structure with an eye to returning more money to shareholders."

 

CROX - Crocs names Reebok exec VP of North America retail

(http://www.chainstoreage.com/article/crocs-names-reebok-exec-vp-north-america-retail?ad=news)

 

  • "Claire Fahie-Conley, VP of U.S. retail for Reebok, has been appointed Crocs' VP of retail for North America. In this role, Fahie-Conley will be responsible for overseeing all aspects of the retail footprint in North America, including the entire fleet of full-price and outlet stores."
  • "Prior to joining Crocs, Fahie-Conley spent 20 years at Reebok."

 

UA - Under Armour signs multi-year partnership with Patrick

(http://www.fibre2fashion.com/news/garment-company-news/newsdetails.aspx?news_id=166417)

 

  • "Under Armour has signed two-time First-Team NFL All-Pro cornerback Patrick Peterson to a multi-year partnership. Selected to the Pro Bowl in each of his first three seasons, Peterson is an elite playmaker with game-changing speed and has established himself as one of the top young players in the NFL."

 

 


WTW: Thoughts Into the Print (2Q14)

Takeaway: WTW's issues are secular, and it doesn't have many options to work with. We're riding the short through the print, and keeping it on.

KEY POINTS

  1. POTENTIAL UPSIDE, DOESN’T MATTER: WTW could sneak out a small top-line beat; our Google Trackers suggest y/y declines in demand moderated somewhat into 2Q14, but not by any material margin.  Short Interest remain elevated, while the sell-side has turned on the name.  So any potential upside could lead to another short-squeeze, but would likely be limited (WTW lost all its gains from the 1Q14 print).  We would fade any upside into the print; remember 2014 will be one of its worst years on record in terms of revenue growth dating back to at least 2005, marked by its weakest winter selling season since at least 2007 (that includes the Great Recession).  There isn't a value play here.
  2. WHAT WE’RE KEYING IN ON: The entire model is driven off its winter selling season and the seasonal attrition rates thereafter.  The attrition rate in 2Q14 will give us a glimpse of what is required in terms of a 1Q15 selling season in order to achieve consensus estimates.  The only thing that would save WTW (in terms of its 2015 prospects) is a marked reduction in seasonal attrition.  As it stands now, WTW would require one of its best winter selling seasons on record to achieve 2015 revenue estimates, and that will not happen without a serious investment in marketing expense (see below)
  3. HEADS THEY LOSE, TAILS THEY LOSE: We believe WTW’s issues are secular.  It’s not the existence of these free apps, it’s rising access to these apps that's the bigger issue.  Member acquisition costs have risen substantially alongside the rise in smartphone penetration.  WTW is in a precarious position of trying to revive its business, which will require investment (particularly in marketing), while trying to preserve profitability on a highly fixed-cost business model in order to service its debt; WTW’s interest coverage ratio is roughly 2.5x.    

 

KEY CHARTS 

WTW: Thoughts Into the Print (2Q14) - WTW   Tracker vs. Attendence

WTW: Thoughts Into the Print (2Q14) - WTW   Selling Seasons 1Q14

WTW: Thoughts Into the Print (2Q14) - WTW   Annual Attrition 2013

WTW: Thoughts Into the Print (2Q14) - Smartphone penetration 3Q13

WTW: Thoughts Into the Print (2Q14) - WTW   Revenue vs. marketing

WTW: Thoughts Into the Print (2Q14) - WTW   Member Acquisition Costs 1Q14

 

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

Thomas Tobin

@HedgeyeHC


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