[video] $PBPB: Why Potbelly Is Still 'Wildly' Overvalued


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




  • BETTER - MGM China was a bit better than projected and much better than expected when the quarter began.  Las Vegas performed in-line.  Q1 commentary was, as expected, positive with RevPAR guidance at +10%.  We did sense some uncertainty with regards to trends for the remaining 3 quarters of the year and limited visibility.



MGM 4Q 2013 REPORT CARD - mgm



  • WORSE:  Project cost increased to $2.9 billion due to redesign of entertainment options.  Remains on track for early 2016 opening.
  • PREVIOUSLY:  Remain on track for an early 2016 opening...budget is still standing at $2.6 billion.


  • BETTER:  4Q Strip REVPAR was 1% - slightly higher than projected.  1Q REVPAR growth expected at 10%.  1Q convention mix: 22% (near peak levels).  For FY 2014, 15.5%-16% mix (near peak levels).
  • PREVIOUSLY:  4Q room revenue to be up slightly year-over-year on relatively flat RevPAR with accelerating trends in the first quarter. In fact, looking into next year, 1Q convention trends are looking exceptionally strong. Are approaching peak convention mix in 1Q with an expected 21% convention room mix and beyond 1Q, expect an increase in convention room mix for all quarters throughout the year.


  • BETTER:  VIP RC increased 32% YoY.  MGM continues to maximize table productivity.
    • Still see opportunities for continued improvement in yield on the VIP tables to maximize profitability from this segment
    • In the process of upgrading main floor and enhancing our product offerings to drive future growth. Remodeling includes renovation and expansion of the Supreme Lounge which has been very successful...expect this to be completed in 2014. The Supreme Lounge is an exclusive area dedicated to high-margin premium mass market customers. 


  • BETTER:  Slot volumes grew 16% in 4Q 2013, compared with 10% growth in 3Q.
  • PREVIOUSLY:  Slot business, overall, has seen some flattening in the market. Even though there's good growth across the market, the growth rates have slowed a little bit.


  • SAME:  Strip flow-through hit 70% in 4Q.  But if you adjust out certain one-time items (e.g. vacation accrual policy), it is within that 50%-60% range.
    • Goal has been in the 60% range on a long-term basis. And that's extremely achievable.
    • Any ADR increase obviously will always go to the bottom line. And then in general, as the convention mix improves and the catering improves, that's a higher-margin business than normal food and beverage business. Hopefully, with the increased visitation, it will increase the occupancy in the shows, which also goes all to bottom line because those are just empty seats if they're not being filled right now. So the flow-through next year should be as strong if not stronger than what we've seen this year.



  • SAME:  Dialogue continuing.  In 1H 2014, MGM will be back in front of NJ DGE commission. 
  • PREVIOUSLY:  First goal is to be relicensed in the state. No reason to expect MGM won't be relicensed there.


In preparation for MAR's FQ4 2013 earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.




  • Occupancy rates at MAR hotels are nearly at record levels in North America, well ahead of industry averages.


  • Transient business benefited from improving mix as high-rated retail business was very strong.
  • Looking to shift more and more of that transient business towards higher-rated segments in the hotels


  • North America Group revenue pace for the Marriott brand for the fourth quarter is up nearly 7% due to a strong short-term booking.
  • 2014 group booking pace for the North American company-operated Marriott-branded hotels is currently up 4% to 5%
    • 4% or plus 4.5% for next year is overwhelmingly volume, not rate. Rate is up very modestly, 1-ish% or 0% to 1%.
  • Seeing more corporate business such as training meetings and new product launches.
  • 60% of 2014 group business is already on the books
  • Expect system-wide RevPAR at North American hotels will likely increase at a 4% to 6% rate in 2014, with the improvement largely coming from rate.
  • Smaller the group, probably the stronger, but seeing improvements really in all segments


  • Weak government demand. RevPAR in downtown D.C. declined about 1.5% while RevPAR at MAR hotels across the greater Washington market declined 6%.


  • In Europe, 4Q RevPAR growth should improve as comparisons get easier in the U.K.
  • In Europe, strong performance in Eastern Europe offset declines in London, enabling +2% RevPAR. 
  • Constant-dollar RevPAR to increase at a low single-digit rate at our European hotels in 2014


  • Modeling a mid-single digit RevPAR growth for 2014 on easy comps
  • Constant-dollar RevPAR in the Middle East will likely remain challenged. 
  • Unrest in Egypt reduced RevPAR in the Middle East by 3%.


  • 2014 constant-dollar RevPAR in the Caribbean and Latin America market to grow at a mid-single-digit rate.
  • Favorable leisure demand drove RevPAR up 7% as greater numbers of groups and leisure travelers enjoyed the resorts in Cancun.


  • Expect mid-single-digit constant-dollar REVPAR in 2014, constrained a bit by recent supply growth


  • Expect roughly 100 basis points of margin improvement for the full year.


  • 4Q North America RevPAR to increase 4.5% to 5.5%.


  • Expect very strong performance at our hotels in New York, Boston, San Antonio, and New Orleans and expect more hotels globally will be paying incentive fees during the year.


  • Expect G&A spending to grow more slowly in 2014.


  • Expect to return roughly $1 billion to shareholders through share repurchases and dividends in 2013 and expect to continue to repurchase shares in 2014.


  • There's no real change in trend lines on attritions or cancellations. Obviously, in the Washington market the whole government shutdown had some impact.

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Still a lot of post Q1 uncertainty




  • Signficant operating leverage in the recovering economy
  • 2013 was a 'new era'
  • US wholly owned EBITDA:  best EBITDA in 5 years
  • Arena will be completed in 1H 2016, could be used for additional convention space
  • Hotel Delano remodel will be completed in Sept 2014
  • 80,000 players visited a MGM property in 2013
  • Completed deep piling on MGM Cotai; have been working on basement substructure; will increase scope/complexity on entertainment options; increased project cost from $2.6BN to $2.9BN; will open in early 2016
  • PG County:  will open in 2016
  • Will seek opportunities in S Korea and Japan
  • Very strong LV convention business in 1Q
  • Strip flow-through 70% (above 50-60% target) - if you adjust certain items, it is within that 50-60 range.
  • Strip REVPAR: +1%, slightly better than guidance; booked more in the quarter for the quarter 
  • 1Q convention mix:  22% (peak levels for any 1Q), almost fully occupied at convention space
  • 1Q:  expect REVPAR +10% YoY
  • 2014 convention mix: 15.5%-16% (approaching peak levels)
  • Aria:  $6MM higher hold benefited EBITDA; F&B increased 11% (higher banquet/buffet revenue)
  • Sold 11 units at Mandarin Oriental ($22MM revenues); 18 units closed in January
  • $1.2BN available liquidity RC; $1.45 BN at MGM China RC
  • 4Q $127MM domestic capex 
  • FY 2013 domestic capex: $324MM - in-line with guidance
  • 4Q other capex:  $4MM MGM Macau, $51MM MGM CHINA 
  • FY 2013 other capex:  $35MM MGM Macau; $204MM MGM Cotai
  • 2014 domestic capex:  $350MM ($75MM LV arena, $170MM PG MD) 
  • 2014 other capex:  $70MM (MGM MACAU) $500MM (MGM cotai)
  • MGM CHINA:  mass volume +12% YoY;  slot handle increased 16% YoY; continued remodel/refurbishments; 
  • CNY was very successful in Macau and Las Vegas
  • Great CES show; very strong month of conventions in January, another strong month in February, successful Super Bowl and March is looking good
  • Continue to focus on FCF


Q & A

  • Quality of convention mix is improving in 2014 - higher banquet/catering/restaurant spending
  • Are more comfortable for 2014 LV REVPAR than they did before; strong in the year, for the year business
  • 2014:  50-60% flow through target 
  • Domestic hold was down a touch in 4Q except for Aria
  • Casino license renewal process for 5 yrs?  Misunderstanding of the issue.  Gov't always had the power to review after 5 yrs.  Govt is comfortable with system in place.
  • Most of 2014 REVPAR growth will come from rate
  • 2015 REVPAR will be better than 2014
  • 2015/2016/2017 convention pace is higher than previous 5 years
  • Airlift also higher; McCarran passengers increased 2%
  • Westjet increased 18 flights to Las Vegas
  • Confident Group business in 2014 will be better than in 2013
  • Lower provisions in 4Q?  Yes.  Some reversals.  Does not expect changes in 2014.
  • Luxury properties had pretty good strength; core properties continue to be challenged by consumer spend.  Correlation between ADR and spend is there.
  • Mandalay Bay/Luxor will have renovations
  • Monte Carlo/NYNY will be positively impacted by Arena and Linq projects
  • MGM China dividend policy:  up to 35% of profits
  • MD/MA:  will own a substantial portion; will use corporate facility for construction spending; try to keep balance sheet relatively neutral
  • Asset sales?  Recently sold some land on outskirts of Strip.  May consider further sales.
  • Borgata license:  dialogue continuing. In 1H 2014, will be back in front of NJ DGE commission.  
  • Vacation accrual reversal:  $4MM
  • LV Strip slot business:  up when the market is actually down
  • Overall slot business down due to the regional properties

$PBPB: Potbelly Goes Boom!

Takeaway: It pays to listen to Penney.

Potbelly is being taken back behind the woodshed today.


Shares of the sandwich maker are currently down well over 10%. Hedgeye Restaurants analyst Howard Penney added PBPB to our Best Idea List as a SHORT on 11/19/13. As he wrote then:


To be clear, we believe Potbelly is a solid company with a strong management team, but it should not be trading at a premium multiple to its aforementioned peers. With that being said, we would not be surprised to see PBPB decline by 30-40% over the next twelve months.


Meanwhile, Hedgeye CEO Keith McCullough shorted it in Real-Time Alerts last Thursday bringing an 11% gain to RTA subscribers.


$PBPB: Potbelly Goes Boom! - pb


Once again, it pays to listen to Penney.



Solid Q4 and guidance. Balance sheet in great shape.




  • Rate growth in group and transient segments
  • Outperformed industry by 140bps in REVPAR in 4Q
  • 2013 F&B increased 4% driven by strong catering activity (+4.8%)
  • Room nights grew in transient/group in Q4 by 3.5%
  • Group momentum picked up in Q4; Group REVPAR up 6.5% in Q4
    • Corporate/association +7%, discount demand -5%; favorable mix grow results by ~+3%
    • Sequester/shutdown impacted -1.5%
    • Group will improve in 2014
      • 70% booked
      • +5.5% revenues
  • Transient - higher retail/corp business was up +6.5% 
    • Rate up 4%, revenue growth 7%
    • Higher-end demand up 9%, overall transient REVPAR 4%, revenues up 7.5%
  • 2013 REVPAR - 2% below peak 2007; on an inflation-basis, 15% below 2007 peak
    • 2013 occupancy exceeded 2007 peak
  • 2013 F&B/group - 10% below peak 2007
  • 2013 adjusted margins:  300bps below peak 2007
  • 2013 comparable hotel adjusted operating profit:  15% below peak 2007
  • Supply in industry will fall below long-term target in near term, excluding New York
  • New Nashville hotel:  fantastic start
  • Powell Hotel 
    • Will be rebranded as UUP hotel
    • Retail space cost $42MM
    • $365,000 per key
  • 6 Transactions in last four months:  5 NA, 1 Europe for ~$540MM
  • Lodging recovery progressing well
  • West Coast: +8.1% REVPAR (ADR: +5.6%), continued mix shift from contract to higher-end transient business
  • San Fran:  +14% REVPAR (+13.7% ADR)
  • San Diego:  +10% REVPAR (+4.6% occu); F&B: +11.6%
  • Hawaii: +2.5% REVPAR, construction of timeshare impacted results; 
  • San Fran, Seattle, Hawaii will outperform in 2014
  • San Diego, LA will perform in-line in 2014
  • New Orleans:  +22% REVPAR (+20.5% ADR) - benefited from 3 strong, high-rated medical city-wide events
  • Houston: +14.3% REVPAR (+15.7% ADR)
  • San Antonio:  +12.5% REVPAR, strong group ADR; expect REVPAR to be negatively impacted by renovations in 2H 2014
  • Philly:  +16.9% REVPAR (+12.3% increase in demand)
  • Boston:  ~+11% REVPAR
  • NY:  +3.9% REVPAR; market REVPAR: -0.1%
  • DC:  +1.8% REVPAR; +8.8% REVPAR comparable hotels in downtown, -6.5% REVPAR decline in VA/MD surburbs 
  • Expect 2014 East portfolio to outperform due to Super Bowl
  • Calgary:  +13.8% REVPAR
  • Latin America:  +7.1% REVPAR
  • Asia/Pacific: +7.0% REVPAR
  • International:  unfavorable FX impacted REVPAR
  • JV:  +5.1% REVPAR in constant euros
    • Expect better performance in 2014 
    • Encouraging signs in Europe
  • 54.2% flow-through in F&B
  • Still room in occu growth particularly in Group but 2014 REVPAR will be driven mostly by rate
  • 21% of FY EBITDA will be in 1Q 2014
  • $310MM cash
  • Debt - $4.1BN
  • Weighted average debt maturity: 6 years
  • Year-end leverage is lowest in the industry

Q & A

  • A hair on the conservative side for 2014 guidance
  • Other revenues (e.g. spa):  15-20% below 2007 peak; has been lagging
  • F&B revenues:  up slightly in occupied room nights
  • Looking to outsource restaurants to 3rd party- profits will increase but revenues will be lower
  • Leverage goal:  3x; at end of 2013, fairly close to 3x
  • 2012 group rate: +2.7%-+2.8%; 2013 is similar
  • Will be active in transaction market in 2014; want to be a net acquirer
    • Particulary in Europe (i.e. Germany, Spain), but not in London
  • Powell Hotel value of retail too high?  Have already received unsolicited offers for higher than the $42MM they paid
  • HST underperformed compared to C-corps
  • Dividend yield: +3%; expect dividends to grow
  • Disciplined in acquisitions
  • NY: high level of supply but bullish on the market
    • Will outperform portfolio due to Super Bowl, Citywide and strong Group activity on the books
    • Renovations will help too
  • 2014 dispositions:  should be in-line with 2013
  • Q1 REVPAR:  stronger quarter relative to rest of quarters in 2014; will be at high end of 5-6% REVPAR range 
  • 4Q group room nights growth was great; revenue booked for 2014 in 4Q is up YoY
  • Marriot Marquis DC will adversely impact results in 2H 2014 - but captured in the 2014 guidance

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