Athletic Footwear Remains Week (again)

Weekly trends for footwear remained weak for the third week in a row, but the overall trajectory was essentially unchanged.  We suspect there will be a lull in near-term in momentum as retailers clear inventory for the back to school season and await help from the calendar to drive demand.  With overall industry trends remaining soft, there were few brand callouts this week.  Converse picked up some momentum, with a 10.6% increase vs. only 1% last week.  Van’s showed the most volatility, with sales declining 13% after increasing 31% last week.  As we highlighted the other day, Under Armour appears to be in clearance mode in the sporting goods channel.  ASP’s for the brand decreased from $81 to $75 over last week.  Overall, athletic footwear trends remain stable but decidedly negative and it remains much too early to make a call on back to school.

Athletic Footwear Remains Week (again) - Sporting Goods Channel Table

Athletic Footwear Remains Week (again) - Footwear and Apparel in Sports Retailers

Athletic Footwear Remains Week (again) - Footwear APparel ASP

Russian Banking Woes

OAO Sberbank reported today that first-half net income fell 92% to 5.3 Billion Rubles or $170 Million from a year earlier. In our post “Ripples In Russia” from 7/17 we highlighted the underlying fundamentals that may pose intermediate to TAIL term risk to the performance of the Russian stock market (RTSI). Sberbank’s 1H ’09 numbers today underline the precarious situation of Russian banks, struggling with low capital levels due to the rise in bad loans, the depreciation of asset values and non ruble debt -while the Kremlin continues to provide assurances that banks will continue to lend. Can the center hold?

Prime Minister Putin, who has increasingly taken on responsibility for leading the economy, was on the tape today saying that Sberbank, the country’s largest bank, should keep lending and not close branches, calling 14% an acceptable interest rate for banks to charge. (In context, 14% represents a 300bp premium over the central bank’s current refinancing rate.) 

Transparency and accountable remain major issues when talking about the Russian economy. That said, it’s painfully obvious that the undercapitalized banking sector is in a precarious position and something has gotta give. At this point a bank bailout would be a tall order that would certainly blow out the government’s debt ratings, and further delay the country’s longer-term recovery process.

We’ll have our Eye on Russian banks, while respecting the high correlation between RTSI energy/commodity prices.

Matthew Hedrick

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Gold: Consensus Isn't Bullish Enough

On February 19th I wrote an Early Look titled “Long America, Short Gold”. For those of you that are new readers, I point that out for accountability purposes as I recall taking plenty of heat from the momentum chasing community for shorting gold.

Having already laid claim to people being “too bullish” on gold then (citing Einhorn making it his largest position at the time!), I beg for your attention to hear me know – I think consensus on gold is no longer bullish enough.

Most of you know that I want to be long what The Client (China) needs, and short what American bankers want them to need (US Treasuries, US Dollars, etc…). Gold is one of those things that China needs a lot more of. China recently reported holding 34M/oz of gold (1054 tons), but that makes them only the 5th largest holder of gold, globally, despite having the most open currency to buy more with.

There are 2 numbers that really matter here:

  1. $1.4 Trillion – that’s $1.4T out of a total $2T in Chinese reserves are in US Dollars/Treasuries
  2. 1.6% of Chinese reserves are in Gold

The average central bank holds at least 10% of their country’s reserves in gold. The Chinese are not interested in gaining exposure to any more US Dollars. Therefore the demand equation here is very straightforward. China needs more gold.

To get to 10% of reserves in gold China would actually need to buy another 5,000 tons. So next time someone tells you “the IMF” is selling 100 tons, send them the math in reply.

Gold, contrary to Mr. Bernanke missing it (inflation coming in Q4), is now breaking out to the upside. Andrew Barber and I have outlined all 3 durations for the price of gold in the chart below. Long term TAIL support remains $871/oz, and the immediate term breakout TRADE line = $931/oz.

Keith R. McCullough
Chief Executive Officer

Gold: Consensus Isn't Bullish Enough - gold


Sports Apparel Weekly Data Update

The latest weekly sports apparel data highlights a marked deceleration in the industry across all channels, with the exception of Family Retail (Meyer, JC Penny, Sears, Stage Stores).  The largest sequential delta in the data comes from the sporting goods channel, which posted a decline of 1.5% for the week vs. a  4.5% gain in the week prior.  Underlying this trend was a large 18.5% decline in the New England region, followed by a 8.7% drop in the Mid-Atlantic.  Additionally, when looking at the distribution channels, there was a positive result of 2% for the full line stores offset by large declines in urban/athletic and internet/catalog.  Average selling prices remained positive for the week as has been the trend for the month so far.  While one week does not make a trend, it is worth nothing that we are now beginning to compare against the beginning of back-to-school 2008.  With most, if not all, retailers citing a later back to school selling season this year vs. last, we would not be surprised to see near-term weakness until the current back to school period picks up later in August.

Sports Apparel Weekly Data Update - Sports Apparel Table

Sports Apparel Weekly Data Update - Sports Apparel   chart

Sports Apparel Weekly Data Update - Sports Apparel ASP chart


Here is our summary from the conf call that just ended. The key takeaway is HST is operating well in a challenging environment.  While there are signs on the margin that lodging fundamentals aren’t getting worse, we’re still far from a recovery.  2010 Street numbers need to come down.




General Commentary on 2Q09:

Seeing a few subtle signs that trends are stabilizing


Excluding the $0.15 of charges, FFO would have beat consensus


Occupancy was slightly better, and ADR decline was worse.  Cost control was better than expected


Segment commentary:

  • Group attrition and cancellations continue to drive down rates as business was replaced by lower rated business
  • Corporate, special corporate also continued to deteriorate
  • Transient rates declined 20%
  • Group nights fell 21% but average group rates were only down 6% because of business booked in prior quarters
  • While the group cancellation rate was still above average, it got less bad and looks like its continuing to get less bad
  • Group booking pace also improved throughout the quarter


Weakness in rate will not abate until economy begins to recovery

  • Although rate deterioration also got less bad throughout the quarter and looks like it has bottomed out

On the investment side, expect that there will be more hotels on the market for sale later this year, HST expects to be opportunistic


The asset sold were non-core and required some material capex, expect to complete another 25MM in sales for the balance of the year


Commentary on outlook:

Visibility is very limited; there is a short booking cycle


The reduction in the RevPAR guidance is tied to the weaker-than-expected ADR in the 2Q09 and the assumption that the environment remains static (sounds like they are sandbagging)


Taking advantage of the IRS ruling allowing them to pay 90% of their dividend in stock


Supply environment is favorable going forward and will likely remain anemic for the next few year

  •  I guess we would argue that supply isn’t really the problem right now… it’s really a demand issue


RevPAR commentary:

Government business continued to benefit them in the quarter, expect the DC region to remain stronger than most through the year.


Also expect San Antonio and New Orleans to continue to outperform given the strong booking pace


Hawaii still impacted from flight reductions, but expect the portfolio to outperform for the balance of the year given easier comps


New York, had strong transient, weak group, and international demand was still solid. Expect it to continue to underperform for the year


San Fran continues to be challenging


Philly should continue to outperform in the third Quarter


New England is suffering from difficult comps from strong Boston performance last year, but also from rooms under renovation.  Expect performance to improve in back-half ‘09


Expect Florida region to struggle in the 3rd quarter


International declined 20.2% on a constant dollar basis- relatively well despite the hit to Mexico property.


Euro-JV underperformed


Operating margins:

Wages decreased 13.9% and unallocated expenses decreased over 14%


Going forward, mix will negatively impact margins


Expect insurance rates to increases


Wages to increase


Balance sheet/Liquidity:

Raised $1.1BN in 1H09


May not be able to close the renegotiated loan on the San Diego Marriott


Will continue to keep a lot of cash on hand until markets improved

Wrote down the asset held for sale, since it will sell below the book value



Are there more costs to continue to cut in the back half of this year?

  • Cost cuts started in earnest around this time this year and the effort has continued through the first half of this year
  • They still think they can continue to cut costs, through the back half of the year, they will be more modest
  • In 2010, they may be able to decrease costs a little bit – more so if the declines are occupancy driven
  • Will be difficult to achieve the same margin results as this year

Urban performance – thought it would be weaker in the quarter, why?

  • Their portfolio benefitted from concentrations in DC, New Orleans and Philadelphia


Group activity for 2010

  • Hard to find a clear theme
  • Booking pace is down significantly, but doesn’t reflect all the cancellations that have occurred this year and 4Q08… so if you adjust for that then its still down but not as much
  • Groups are definitely rate sensitive
  • Finding that a lot of groups are looking to get an all-in meeting price (F&B and other services) – ie looking for package deal
  • Have seen some pick up in booking activity but still behind where they were last year
  • In 3Q expect pace to be about down 20%, pace is about the same though but doesn’t capture cancelations – so adjusted about down 15%

M&A environment

  • Difficult to characterize
  • No more buyers than there were in the beginning of the year
  • Mortgage market is still difficult
  • Buyers are still all cash for the first few years of the investment
  • Cap rate side – no consistent themes right now. Cap rates are definitely falling, as you would naturally expect.  Discounts to replacement cost.  However, given the dearth of transactions, this is more anecdotal
  • Lenders are more likely to take a stronger stance as they get the keys handed back more often, but don’t expect the transaction environment to really pick up until next year (default driven that is)

How deep are the current cuts (floors shut down/ restaurants shut down)?

  • There are some hotel where they have shut down the entire tower
  • They have been shutting down floors
  • F&B outlets have reduced hours across the board
    • Trying to serve dinner from the bar/ lobby or just room service in certain cases as well
  • Success in cutting managers by 25%, postponing & cutting bonuses

Are they teeing themselves to acquire hotels in the 2010 & 2011?

  • Best time to be a buyer is earlier in the cycle, to buy at good cash flows and below replacement costs
  • While they are aware that they are not through the downturn, they think the time to be a buyer is when they think they have hit bottom and things are going to begin to improve
  • Don’t expect them to be super aggressive
  • But expect them to add selectively through 2010 & 2011

Do they need to raise more money to become net acquirers?

  • Have some dry powder now
  • But will look to follow the 2003-2005 model, which was additional equity issuances
  • Would consider buying debt/ paper to get at the assets, although it’s challenging because most of the loans are in pools.  But would be very interested, where it is possible, to get asset through debt acquisition

Size limits in the mortgage market

  • Big change once you go over a $100MM – need 2 lenders or more usually
  • San Diego loan is complex.  Lenders want a say in the renovations.  If they can, they will do a new mortgage; otherwise will just repay the loan.

See themselves reducing market diversity over time and increase concentration that they like (DC/ San Fran) and worried about some southern markets with supply issues.


Could see that their brand profile to widen – like getting more Hilton and Intercontinental. 


Not inconceivable that they would be smaller over next few years, but do expect to be net acquirer. 


Want to be in larger hotels, sell some smaller ones… less hotels more rooms.


Full year guidance at the low end of their guidance, doesn’t necessarily reflect the “less bad” thesis.


General sense is that 3Q09 is that it will match up with 2Q… could be a little better.  Still expect 4Q09 to be better solely due to easier comp, but will be the weakest on a 2 year trailing basis. 


RevPAR range 17-23% of RevPAR declines in the back half.  Low end assumes things do not get any better.


Asset sales that were consummated, cap rate was in the mid 7’s.  Capex plan another of 15-20k per key over next few years… so including that it’s a low 6 cap rate. 

  • Basically cash flow was awful and they’re suburban and smallish… and thought the outlook would not be good… cap rate is irrelevant in our opinion.


Don’t think that they can keep costs flat in 2010.  Some of that depends on what happens with inflation next year.  Unless occupancy stays flat and utility costs decline, it will be extremely hard not to have modest cost increases.  Wage increases at the hourly level, if not the more senior level. 


Dividend reduction

  • Mostly because of the equity issuance (same dollar amount over more shares = less per share)
  • Operating and liquidity environments are still challenging so think saving $100MM in cash is most prudent

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