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VIDEO: King Dollar


Hedgeye CEO Keith McCullough appeared a guest host on CNBC's The Kudlow Report this evening. Among the topics discussed was the ongoing currency wars and how a strong US dollar helps deflate the commodity bubble created by the Federal Reserve's quantitative easing programs. If you look at the dollar on a 40-year basis, the all-time low was in 2011 and coincidentally, commodity prices hit an all time high in 2011. If we get the Federal Reserve out of the way or introduce spending cuts, we'll drive down inflation which in turn will drive stocks higher as consumption increases through lower food and gas prices, etc. Get the dollar right and you get a lot of other things right.


Watch Keith's full appearance on Kudlow Report on the video above.


CAGNY Day 3 – Some Good Stories (IFF and AVP), but We Like NWL

We have observed a good bit of NWL CEO Mike Polk’s professional career, from the old Kraft to Unilever and now NWL – we like the story he told and the way he thinks about the business.


International Flavors & Fragrances (IFF)

Since HNZ apparently couldn’t get out of CAGNY fast enough, IFF stepped up to the plate and took the morning presentation.  It’s a good story, and to the extent that innovation has been a consistent theme throughout the conference (we call it the cost of doing business), IFF is the innovation backstop for most of the companies in the staples universe.  Total business grows 2-3% globally, and IFF tends to be a consistent share gainer over time (16% share of market).   Scale matters in this business (IFF has it) as the global companies that IFF partners with want the ability to deliver local solutions on a global scale.  What also struck us was that IFF was an underappreciated emerging markets story, which only stands to reason as the global CPG companies drag preferred suppliers along as the business expands into emerging markets. The company is at a low point in the leverage cycle in a global consolidating industry – possibility exists for accretive deals.


Procter & Gamble (PG)

Company focused on some overdue innovations – again we go back to our comment that innovation is the lifeblood of the staples sector.  Company seems to realize (finally) that you can only take pricing or price at a premium when you offer compelling value to the consumer and communicate that value.  Value needs to be communicated to retail partners as well – make it a win/win (really hate that phrase).  Rate of change of innovation is increasing, and thinking globally about those innovations.  Company basically admitted that productivity had taken a back seat when results were more robust – I see productivity as a process of constant improvement, and it will be interesting to see just how ingrained this process becomes in PG once the big savings program runs its course.  There are some bad habits that have been ingrained in this company over a long period – pricing without value and using that pricing umbrella as an excuse to be less diligent about costs.  The process of change at PG is well-begun, let’s see how well the lessons of the past are learned.  At least the company is no longer relying on sales growth in order to leverage the company’s SG&A base.


Pepsi (PEP)

The presentation started out as your basic business overview – yawn.  Some of the global demographics were interesting, for example - sweet spot between $10,000 and $20,000 in GDP per capita in terms of adoption of the company’s products – a number of emerging markets entering into and currently in the sweet spot for the company.   Company followed up with familiar chart – the opportunity to get per capita consumption up to the levels seen in Mexico – this charts never sit all that well with us, truthfully.  A single number never seems to do justice to the substantial differences between consumers in different geographies.  Next we move on to the obligatory commentary on innovation – have to say that the Doritos/Taco Bell shells rock hard.  And what do you know – commentary on productivity.  No need for large scale M&A – stated twice, it was so nice.


Avon Products (AVP)

I like leading in with the mea culpa for years of disappointing stakeholders – probably understated the level of frustration a bit.  The company has some very aggressive financial goals, but seems to have the strategy in place to execute against the plan, starting with – you guessed it – innovation.  The company has seen some market share challenges across multiple categories – but the categories are attractive in terms of the long-term growth, but need to get fair share of growth.  Innovation for AVP is a little more complicated, because there is a component of educating the representatives as to the benefits of the innovation.  Representative is social connection between product and consumers and need to upgrade the capabilities of the representative.  All things considered, it was a very comprehensive and confident presentation with a focus on products, people and places.


Clorox (CLX)

The company basically took a victory lap for what it had accomplished since 2008 - double digit EPS growth, 2-3% consistent top line growth.  Interesting, and obviously true, but we are not big on rear-view mirror stuff.  The company shared some very interesting data on bleach compaction and incremental advertising on bleach, with the data on advertising suggesting that advertising targeted at adults under age 35 actually drove an uptick in usage of bleach.  Who says advertising doesn’t work?  The “give your home a flu shot” campaign and healthcare solutions make sense and are certainly on trend.    Further, the company’s opportunity outside the U.S. appears reasonable and on trend with respect to health and wellness.  Management seemed very confident about the margin opportunity and the ability to execute against those plans for the foreseeable future, in part because of a more benign commodity environment.


Newell Rubbermaid (NWL)

The company outlined a fairly compelling investment thesis to start, a tail wind behind categories - housing starts is a relevant indicator for 1/3 of NWL's categories.  Second, cost savings provide a reasonable clear line of sight to EPS growth.  Next, innovate and invest to move closer to the virtuous cycle to which all staples companies aspire.  The company is focusing efforts behind key categories that represent material growth opportunities with superior margin structures.  The rest of the portfolio has to run lean and mean (used to be run as autonomous business units with associated cost structure).   This year will be a transition year, with progress accelerating throughout the year – NWL, weak Q1, stronger Q2 – just pacing.  Good management, good story.


Church & Dwight (CHD)

CHD boasts that they are a smaller player at CAGNY (2012 Rev. $3B, Market cap $8B) and are “Total Shareholder Return (TSR) Junkies” with 12 consecutive years of 10%+ EPS growth. The company describes its portfolio of brands as recession resistant, 40% in the value category, with a compelling offering to meet the “new normal” consumer.  Alongside its 8 Power brands that equate to 80% of profits, CHD is looking to make condoms, lubricants, and vibrators its next megabrand and grow its recent acquisition of Avid Health in vitamin gummies. Its 2013 Outlook is 3-4% Organic Sales; GM 44.2% (core business ex-Avid +25-50bps vs ’12); and 14% EPS growth to $2.79 on a marketing spend that is flat at 12.2% vs last year. CHD’s balance sheet is “under levered” at 1.4x. The company did not signal any acquisition targets but is confident in its ability to find targets that it can make earnings accretive within the first 12 months.


Energizer (ENR)

Successful innovation and restructuring projects – it certainly sounds familiar, but it is a fairly new concept for ENR.  A familiar name to most of us (Schick Hydro) is the example of successful innovation provided by CEO Ward Klein – multiple market share examples were provided across various line extensions.   Presentation moves to a build-up of the organic growth and acquisition growth that has created the Energizer of today – moved on to the tale of woe that is the secular challenges of the battery category.  Interesting that it appears that restructuring was forced on the company by the challenges of the category, rather than any discipline with respect to costs.  The meat of the presentation was familiar – manage batteries for cash, generate growth from personal care.  At the end, it was also nice to see the company continue to acknowledge the bare minimum required of them as a public company in terms of investor relations, eschewing the company’s prior history where it acted more like a quasi-private company.  Golf clap?




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


VIDEO: What's Next For Stocks?


On today’s Fast Money Halftime Report on CNBC, Hedgeye CEO Keith McCullough debated with Dennis Gartman, founder of The Gartman Letter, over which way the US stock market is headed. Gartman forsees a “7 percent correction” in stocks while Keith lays out his bullish case for the market. Commodity prices coming down will act as a catalyst for consumption. Strong Dollar = Strong America as the great commodity bubble deflates. 


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Both were up in Q4 but Singapore VIP volume surged while Macau grew only modestly.  Prior to Q4, the correlation was much higher.


  • Singapore 4Q VIP rolling chip (RC) volume soared 50% YoY while in Macau, 4Q VIP volume only gained 5% YoY.
  • Correlation between Singapore RC volume and Macau RC volume prior to Q4 was 0.86
  • Low hold usually drives higher volumes since people keep playing when they win.  Singapore held very low in Q4 while Macau was close to normal.  Singapore's a relatively new market so VIP business should grow faster than that in Macau.
  • Genting today was upbeat regarding VIP volume growth while Macau's VIP volume growth thus far in 2013 has been subdued
  • It remains to be seen if Singapore is taking VIP share from Macau. 




Pricing In The Restaurants Sector

Yesterday, Hedgeye Restaurants Sector Head Howard Penney hosted a conference call with Leslie Kerr, founder and CEO of Intellaprice.  Leslie built the pricing structure for Dunkin’ Donuts and has held brand management and strategic positions at Baskin-Robbins, PepsiCo Restaurant Services Group, and Disney Consumer Products.  After working in Coopers & Lybrand’s compensation consulting practice, Leslie founded Intellaprice, a recognized leader in pricing strategies, finance, brand management consulting.


Leslie presented a “Pricing 101” seminar for subscribers.  Investors almost never think about how a restaurant chain arrives at prices for its menu offerings.  Worse, many restaurant companies don’t think strategically about pricing.  Intellaprice focuses company managements to focus on pricing the same way they focus on areas such as inventory management, operations, or purchasing.


A pricing strategy reflects relationships within the company.  Who makles pricing decisions?  What is the company’s brand image and objective, and how does pricing work to achieve that objective?  Who is the actual customer of the company’s pricing strategy?  (It’s often the franchisee, not the customer.)  How does a company derive pricing information, and who uses that data?


Companies should view pricing in the context of brand identification.  What does a brand stand for?  What is the objective of pricing?  It’s not enough to say “we sell a premium product, so we charge more.”  A shop owner who says “I’m a discounter, so I’ll charge 25% less than the store across the street” has a pricing strategy.  Many major companies don’t even have something that basic.


Kerr says it is surprising how many major companies do not understand their own pricing data, and where no one is clearly responsible for pricing policy.  Despite tremendous quantities of price data flowing through a company, many companies do not compile this data into usable information to make available to operators.  Kerr says most point-of-sale (POS) systems are not set up to track pricing patterns, and many companies do not communicate a pricing strategy to their managers or franchisees, making it impossible for operators to make effective pricing decisions.


The goal of a pricing policy is to support franchisees and managers by laying out strategic reasons for corporate pricing decisions, and to make pricing a basic and ongoing part of business discussions.


Kerr says her research at Intellaprice shows that the return on investment to establish a pricing strategy can be over four times the cost of establishing that strategy, and she says her clients experience sales increases of up to 3% as a result of using her recommendations.

The “Five D’s of Pricing”: 

DEBUNKING – managers believe antitrust laws make it illegal to discuss pricing.  It is illegal to price-fix, but it is perfectly legal to have a corporate pricing strategy.


Companies let pricing decisions default to other functions: finance on the basis of profitability, marketing on the basis of sales volume.  But, says Kerr, successful companies see pricing as a component of brand definition.


Companies believe that the market dictates prices, or that technological solutions – expensive software packages – should make pricing determinations.


Kerr says all of these approaches lead to inefficient pricing.  Pricing must be part of a rigorous management decision-making process.


DEFINING – a price strategy is more than just saying “we’re a premium brand,” or “we’re a discounter.”  Management needs to identify business objectives and the role pricing plays in brand and company identity, what Kerr calls a “Pricing Philosophy.”


DIRECTION – pricing needs to be a defined and repeatable process that includes data collection and analysis, testing, and the development of optimal pricing.  This must be communicated clearly across the company.  The loop closes with performance analysis, which becomes the data collection stage for the next iteration of the process.


Kerr gave examples using four approaches to synthesizing information:

Competitive – compare with prices of comparable or substitute goods

Consumer – public perception of products and price sensitivity

Store – demographics and sales mix

Economic – cost, profitability and economic trends


She then laid out four pricing methods, citing pros and cons of each:

The Market-Based approach provides good price data on price behavior, but lacks predictive ability.

Consumer-Based measures price sensitivity and purchasing decisions, but is too costly to be used exclusively.

Price Optimization allows a company to leverage its own sales data but does not allow any non-price factors into the decision-making process.


Cost-Plus is the simplest to apply, but it ignores the customer’s willingness to pay for the product.


DATA – a company chooses among sources of information (its own POS data, competitors’ prices, customer sensitivity).  A number of services also offer statistical tools for various retail settings.


The database must be appropriate for the company and its industry.  Brand performance, customer traffic and comments and complaints are among the most useful sources of information.


DECISIONS – what makes a successful pricing decision?  It must be integrated into the company’s overall decision making.  It is grounded in reality.  It emerges from a continuous process linked to company objectives. The most successful pricing processes are built around pricing committees that work across functional areas of a company, communicating within the organization and harmonizing objectives.  The group responsible for pricing must also stay in communication with franchisees, brand managers, and other decision makers in the field.  Effective pricing managers have ongoing dialogue that also provides valuable information as an input to the pricing decision-making process.



Pricing has been a neglected component of corporate strategy.  Investors should ask: does this company have an established pricing process?  Who is responsible for pricing decisions – Where in the corporate structure does pricing “live”?  How robust is the pricing process?  What resources are committed to it?  Are senior executives involved in the pricing process?  What pricing data is used for decisions, and what other inputs does the process rely on?


Kerr’s analysis shows that companies have realized profits in excess of 400% of every dollar committed to developing a pricing strategy.  Yet this is an area that remains largely unexplored, even by some major firms.  In mature industries, such as restaurants, marginal differences in profitability can sometimes drive significant gains in stock price.  Investors who learn to ask hard questions about a company’s pricing strategy – or lack thereof – stand to be rewarded. 


Takeaway: We expect Q1 RevPAR to exceed guidance for most lodgers but we prefer HOT.

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance.




  •  BETTER: Considering the impact of Sandy and the calender shift, 4Q was strong. Guidance and tone on the call was also better than other lodging companies


  • MIXED:  Group bookings are up 4% in room nights for 2013.  About 75% of group room nights for 2013 are on the books already.  Group revenue on the books for 2013 is up 6.5% in revenues, lower than previous guidance due to Sandy impact.  Mgmt is quite bullish regarding the group outlook in 2013.
  • PREVIOUSLY:  "Our activity for 2013 continues to show sequential improvement with revenues on the books now 8% ahead of the prior year. A great majority of this improvement is happening in our larger group hotels, which are benefiting as customers began to plan more proactively. Looking at the fourth quarter and into next year, we continue to be encouraged by the positive trends in group business. While current booking activity or current quarter booking activity will likely slow somewhat because fewer room blocks are available.  Overall, as we look at the quarter, we are still expecting group to be certainly up meaningfully in the fourth quarter. We do not expect group to be as strong in Q4 as it was in Q3."


  • SAME:  Occupancy has passed the 2007 peak, but still remain below its historic peak of 78%.  2013 REVPAR growth (+5-7%) will be driven mostly by rate.
  • PREVIOUSLY:  "While it's premature to offer any specific guidance relative to RevPAR or revenue growth for 2013, we do believe that the fundamentals for our business continue to be attractive. We expect to enter next year with an occupancy level higher than we had in 2007, the strong booking pace I referenced and supply at a near record low of 0.5% in our markets. We are very confident that our managers will have success in negotiating higher special corporate rates this fall. Additionally, international travel continues to grow at a high-single-digit rate, adding demands in our priority gateway markets. All of these factors should result in solid RevPAR growth in the coming year."


  • BETTER:  4Q REVPAR +10.2%, expect Boston to have another good year due to solid group bookings
  • PREVIOUSLY: "We expect our Boston hotels to have a good fourth quarter due to strength in group revenues and an expectation of continuing strong transient rates."


  • SAME:  REVPAR increased 10.9% (ADR: +6%, OCCU: 4%) due to favorable business mix.  2013 will be affected by the San Francisco Marriott Marquis renovation.
  • PREVIOUSLY:  "We expect our San Francisco hotels to continue to perform very well in the fourth quarter, as strong group and transient demand will allow us to continue to drive rate."


  • BETTER:  Outperformed expectations (+12.3% REVPAR, +4% occup, +7% rate); Hawaii market for 2013 will be strong due to group bookings though renovations will have some impact.
  • PREVIOUSLY:  "We expect our Hawaiian hotels to have a good fourth quarter."


  • SAME:  REVPAR increased 1.7% due to Hurricane Sandy and various renovations.  Expect New York to be a top performing market in 2013.
  • PREVIOUSLY:  "Results were affected by renovations at three hotels, driving ADR growth in New York has been challenging this year and we expect that trend to continue in the fourth quarter."


  • SAME:  RevPAR increased 8.8%; expect Chicago hotels to continue to do well in 2013.
  • PREVIOUSLY:  "RevPAR increased 3.5%, driven by an increase in rate of nearly 3%, a slight improvement in occupancy. We expect our Chicago hotels to perform much better in the fourth quarter due to better group and transient demand."


  • SAME:  REVPAR: -4.3% (Hurricane Sandy and renovations).  Expect 2013 to be better than 2012 though government spending will continue to be sluggish.   
  • PREVIOUSLY:  "Both group and transient demand were weak as there was little activity on Capitol Hill and election-year activities were outside of D.C. Results in the quarter were hurt by the rooms renovation at the Hyatt Regency on Capitol Hill. We have a series of meeting space and rooms renovations scheduled for the fourth quarter and we expect D.C. to continue to underperform the portfolio. We expect 2013 to be a better year for D.C."


  • SAME:  F&B revenues only grew 1% due to challenging comps.
  • PREVIOUSLY:  "We are anticipating lower growth in F&B revenue and profitability in the fourth quarter of this year due to an unfavorable comparison for 2011, where F&B revenue grew 6.8%, as well as the anticipated impact of the challenging holiday and election calendar."


  • WORSE:  Expect unallocated costs to increase more than inflation, particularly for sales and marketing
  • PREVIOUSLY:  "We expect unallocated cost to increase in line with inflation, particularly for sales and marketing where higher revenues will increase cost. We also expect utilities to decline in the quarter albeit at a much lower level of decline than we experienced in the third quarter."


  • SLIGHTLY BETTER:  Property taxes increased 5% in 2012
  • PREVIOUSLY:  "At this point, we expect the full year increase in the 6% area as we have been successful in reducing several current year assessments and challenging prior year assessments."


  • SAME:  Expects to be a net acquirer in 2013 and for M&A activity to be roughly equivalent for 2013 as for 2012 for the market as a whole. 
  • PREVIOUSLY:  "As we look at 2013, I would say that, while we're certainly happy with the disposition pricing that we seem to be attracting on the assets that we're looking at selling, I also think that we feel fairly comfortable that this is going to be an extended cycle. And so I would expect that we would continue to be active in 2013. Whether we're a net acquirer or a net seller probably depends more on how attractive the actual acquisition opportunities that develop over the course of 2013. But I think by and large our intent is to continue to be active in the year. And if I were trying to plan it out perfectly, I'd probably say we'd probably be about neutral in 2013."


  • SAME:  Total capital spending for 2013 (Redevelopment/ ROI/ Acquisition/ Renewal & Replacement) at the midpoint is $420MM, a substantial decline from the $638MM spent in 2012.
  • PREVIOUSLY:  "We're fairly comfortable that our capital spending in 2013 will decline compared to the levels that we had in 2012 and it should be by a fairly significant amount."

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