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Given the preannouncement on September 23rd, there shouldn’t be any big surprises on MAR’s 3Q09 call. 


We expect MAR's 3Q results to be somewhat messy given the $760MM of impairment charges related to the timeshare business.  We all know that the leisure business is elastic; the real question is whether the corporate segment of the business is showing any signs of life.  We don’t think so.


On September 23rd, in addition to announcing a restructuring of their timeshare business, MAR also gave an update on its 3Q09 NA comparable system wide RevPAR performance which is now expected to be down 19%.  The results for 3Q are a little better than the expected 20-23% decline MAR guided us to in July, with the better-than-expected performance driven by leisure demand.  This comes as little surprise to us since MAR alluded to this on their last call, CCL reiterated the same comments on its earnings call several weeks ago and we know that leisure demand is elastic. 


“Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers.”

-Arne Sorenson; July 16, 2009

The real issue for MAR and most of our lodging companies is that any real recovery will rely on the health of corporate travel, which is where the majority of their business is sourced.  With unemployment still rising and approaching 10%, albeit at a slower pace of increase, we don’t see any immediate rebound in the cards for corporate lodging demand.  However, given the cyclical nature of the lodging group, as long as people continue to believe a market recovery is around the corner, lodging stocks can continue to perform. 



3Q09 Preview:

Excluding extraordinary charges, our numbers are at the top end of MAR’s guidance and a little ahead of consensus.  We think MAR will print $0.14 EPS (guidance: $0.09-$0.14, Street: $0.12) and $162MM in adjusted EBITDA (Street: $159MM) tomorrow.  Timeshare is always a wild card, especially this quarter with all of the charges, but we expect total fee income to come in at $220MM and owned and leased income to come in at $7MM.


Marriott should benefit from a weak dollar in 4Q and in 2010 if exchange rates stay where they are.  However, we are still moderately below the street and MAR’s guidance for 4Q09 and below the street for 2010. Marriott typically gives preliminary guidance for the following year in 3Q.



Timeshare “Youtube”:

We expect MAR to elaborate and give an update in its new timeshare strategy announced on September 23rd.  As a reminder, below is a “Youtube” of MAR’s new timeshare strategy. 


"Today's announcement reflects the significant decline in demand for luxury residential real estate over the last year. It also reflects the relative strength and deeper market of the traditional timeshare business which, while impacted by the weak economy, has proved to be more resilient. For all aspects of this business, our goal remains to drive cash flow. We expect the timeshare segment to produce positive cash flow in 2009, higher levels of cash flow in 2010, and improving profitability."

  • “Marriott expects to reduce residential prices, convert certain proposed projects to other uses, and sell some undeveloped land. Going forward, while Marriott expects to continue to license and manage luxury residential projects developed by others as part of its lodging business, it does not expect its timeshare segment to pursue new Marriott-funded residential development projects.”
  • “Demand for luxury fractional units remains constrained by the weak economy and the significant supply of luxury residential real estate on the market. As a result, the company has decided to reduce prices of existing fractional units to accelerate sales and cash flow, prompting the third quarter charge. The company will sell a portion of its fractional inventory as part of the new portfolio membership program in Ritz-Carlton Destination Club ("RCDC")”
  • Traditional U.S. timeshare business, recent successful marketing promotions included volume discounts and other purchase incentives. The company expects to continue targeted short-term promotions”
  • “Company's four European timeshare and fractional resorts continue to experience low demand. As a result, the company plans to continue promotional pricing and marketing incentives, while reducing overhead to accelerate sales and cash flow. The company is currently not pursuing additional development in Europe.”


2Q09 “Youtube”:

Business trends:

  • Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers.
  • With occupancy levels stabilizing in the low to mid 60’s, pricing has become a greater challenge. Everyone is price sensitive today, not just vacationers. We expect pricing power to return only as occupancy recovers.
  • Outside North America we are starting to see more significant RevPar declines with the economic downturn affecting most markets.
  • We have eased brand standards where it makes sense and deferred scheduled renovations to help owners.
  • On the development front, we opened more than 8,000 rooms during the quarter and have 110,000 rooms in the pipeline
  • Going forward... it gets harder and harder to maintain those margins because it is a rate driven drop. In addition, comps get more difficult because we actually started in the second quarter, but more so in the third quarter, cutting and controlling costs out in the field.  I wouldn’t give up and say there is nothing there but it is going to get more difficult going forward.
  • Right now we have a very short booking. The meeting planners bookers are sitting on the sidelines waiting to see if they can get a better deal, hoping for better pricing, and so there is a very short window right now.


Balance sheet commentary:

  • We continue to aggressively manage our balance sheet and we are committed to our investment grade credit rating.
  • Through continued reductions in our investment spending and substantial cash flow from our fee based model, we expect to be able to continue to reduce debt in 2010, further improving our leverage ratios.


Chart of The Day: Bombed Out Buck?

I’m a Bloomberg guy, so I must admit that I did not truly appreciate how consensus our long standing Burning The Buck call has become. A few days on the road, from Denver to Pittsburgh, being force fed CNBC in my hotel rooms changed that. When Melissa Lee thinks she is a US Dollar correlation expert, a bottoming process for the buck is likely in motion.


This inverse correlation can make you laugh. It can also make you cry. If you are short REFLATION stocks on Dollar Down days, you get the crying part. Last week, the US Dollar was up on the week, for the 2nd consecutive week, and the SP500 corrected, as a result. In the last 2 days, the US Dollar has burned to a higher-low, stoking returns for anyone who was braver than I to stay with this dominant global macro TREND until the bitter end.


For now, my initial thoughts on a Bombed Out Buck are immediate, not intermediate, term. At the US Dollar Index price of $78.61 (chart below), you can see the dominating intermediate term TREND line of a Burning Buck. That TREND not setting up to change any time soon.


What could change, and quickly, is the immediate term duration (3 weeks or less), and if I see that resistance line of $77.07 overcome, it will immediately become support. The point here is that there is no line of resistance between that TRADE ($77.07) and TREND ($78.61) line. A bubbling up of the buck to the tune of a +2% move (from $77.07 to $78.61) will definitely wreak havoc on the REFLATION trade. That I know. That’s why I am raising my position in US Cash.


This morning’s earlier lows in the US Dollar (and highs for the US Equity Futures) came with a US Dollar Index hitting higher-lows (versus the YTD low of $75.80). Higher-lows help us understand that bottoms are processes, not points.



Keith R. McCullough
Chief Executive Officer


Chart of The Day: Bombed Out Buck? - a1


Weekly POS Looking Good into SSS Day

Some very notable trends on the margin that play into the hype around recent sales strength at retail. Easy comps or not, it’s a reality…


Industry Call-Outs:

  • Total sports apparel sales made a large sequential improvement to up 7% Y/Y vs. last week’s reading of down 0.5% Y/Y.
  • Total sports apparel units had three consecutive weeks of sequential improvements and finally posted a Y/Y growth reading – up 4% - aided by a large sequential improvement in the Discount/Mass Retailers channel – from down 5% Y/Y last week to up 14% Y/Y.
  • A large sequential improvement in ASP for the Family Retailers Channel – from down 5% Y/Y last week to up 30% Y/Y – helped to boost overall industry ASP by 300bps sequentially.

Category Call-Outs:

  • Outdoor Outerwear sales posted a large sequential improvement – from down 16% Y/Y last week to up 11% Y/Y.
  • Compression Apparel sales also posted a sizable sequential improvement – from down 3% Y/Y last week to up 9% Y/Y.

Brand Call-Outs:

  • For the first time in 18 weeks, Nike posted a Y/Y decline in market share, down 71bps from up 172bps last week.
  • After two consecutive weeks of Y/Y dollar sales losses, Columbia (up 7%), VF Corp (up 6%), and Under Armour (up 6%) all posted Y/Y dollar sales gains.
  • Columbia is the only company in our sample to register a Y/Y increase in ASP this week, up 2%.
  • For the first time in three weeks, Columbia also registered a Y/Y increase in market share, though rather minimal, up only 2bps.

Geographical Call-Outs:

  • New England was the only region in the U.S. to register a Y/Y dollar sales decline this week – down 7%.


Weekly POS Looking Good into SSS Day - 1


Weekly POS Looking Good into SSS Day - 2


Weekly POS Looking Good into SSS Day - 3


Weekly POS Looking Good into SSS Day - 4


- Darius Dale

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Same-store sales trends in Q4 to date are consistent with the overall trends in Q3 (same-store sales growth was -6%).  The company also expects U.S. restaurant margins to decline in the fourth quarter.  The company will be lapping its first quarter of positive margin growth in some time.  Management said that the U.S. division will not experience the same level of benefit from favorable commodity costs in Q4 as it did in Q3 and some pricing will also be rolling off during the quarter.  So, as we said earlier, there will be little follow through from the 18% reported operating profit growth in Q3.

PSS: YouTubing Analyst Day. SSS Nuggets

PSS: YouTubing Analyst Day. SSS Nuggets

OCTOBER 7, 2009





Notable positive trajectory in the PSS story vis/vis last year’s meeting. Much is not news to us, or our above-consensus estimates. But the bullish EBIT growth contribution expectations from Sperry and Saucony definitely stood out.


PSS: YouTubing Analyst Day. SSS Nuggets - 1

PSS: YouTubing Analyst Day. SSS Nuggets - 2




Some Notable Call Outs


  • In a blow to social media (mostly blogs), the FTC has ruled that bloggers and supposed “amateur” reviewers must disclose when they receive freebies or compensation. Essentially, once monetary consideration is made in return for a review or commentary a blogger is now subject to the same ethics and rules as a professional. While I think this even’s the playing field a bit for those in the traditional media world competing with the upstart social media marketers, it is very unlikely that these regulations will be effectively enforced. This reminds me of the effort to stop illegal downloading of music and we know how that has gone.


  • Despite an intense focus on price within the grocery channel, a recent IBM survey found that 72% of respondents are more concerned with quality than price. We suspect this bodes well for those retailers focusing on actually building quality private label offerings rather than simply becoming a low cost provider.


  • In an abrupt move, specialty retailer of ink, toner, and other small office supplies, InkStop closed its doors on Friday and laid off all employees until further notice. The 152 store chain told its employees the stores were temporarily closing while a restructuring plan was devised. However, employees were further told there would be no more paychecks or benefits due to cash constraints. At one point, the company raised $80 million in private equity funds with hopes of growing the chain to 2,000-3,000 stores.


  • Early peak at same store sales trends confirms positive expectations and what is likely a day of solid results tomorrow:
    • COST Sept comps were better than expected and marked the first pos comp for company in 12 months.  Gradual improvement there continues on the topline as compares now become very easy.  Trumping same-store sales however was the better than expected earnings of $0.85 vs Street at $0.77.  Ex a $0.02 LIFO benefit it was still a sizable beat.  Gross margin expansion was the key to upside.  On the expense side, SG&A remained under pressure due mostly to lack of top line leverage. Bottom line, a gradual but improving trend on the topline against easier compares and with a slight change in mix towards more discretionary purchases should continue to drive earnings higher.  The company conference call is the key to all details including guidance, balance sheet items, and key margin drivers so I’ll be listening closely to discern anything incremental.
    • FDO showed a big bounce back in same store sales for September, up 5% after reporting a disappointing comp for 4Q.  Recall that they pre-announced the 4Q comp of 1% (Street was looking for 3.6% at the time) citing difficult compares with prior year stimulus efforts.
    • WWW mentioned their 92 company owned stores posted a 4% comp in their 3Q.  I don’t have a compare for this one, but positive comps are still a rare occurrence…





Skechers partners with Winner Sports to enter Indian market - Skechers USA, Inc. (NYSE: SKX), one of the global leaders in the lifestyle footwear industry, today announced that it has signed a deal with Winner Sports Pvt. Ltd. – a wholly-owned subsidiary of Pantaloon Retail India Ltd. – to license and distribute Skechers footwear and apparel in India. <indiaretailing.com>


Twenty-Six New Stores for Target - Target will open 26 new stores nationwide on Oct. 11. The retailer's expansion sees the creation of 5,000 jobs. The openings include 21 general merchandise stores, 18 of which will have expanded food offerings. Five will be full-grocery SuperTargets. Locations include Alaska, California, Illinois, Oregon, South Dakota, Texas, Mississippi, Florida, Pennsylvania and Massachusetts. <licensemag.com>


Canada to Drop Textile Import Duties - The Canadian government plans to eliminate import duties paid on textiles used in apparel manufacturing in the next five years. Although the Department of Finance will consider requests for continued tariff protection for specific products, any duties that remain in place after consultation would be phased out over a period of five years. <wwd.com>


South African Textiles Strike Ends - Clothing workers in South Africa returned to work Thursday, two weeks after a nationwide strike organized by the South African Clothing & Textile Workers Union began, but problems persist for the industry. Union General Secretary Andre Kriel said both sides had reached an agreement, with the assistance of the Commission for Conciliation, Mediation & Arbitration. At a press conference, Kriel said, “The union has always said it is better to find a solution to this situation than to have a strike.” Some 55,000 workers had abandoned their posts at the factories and taken to the streets in protest against what was considered lower-than-acceptable wage hikes. <wwd.com>


Puma Goes Mobile - Puma has signed a licensing agreement with the French mobile communications company Sagem Wireless to launch a Puma mobile handset in the second quarter of 2010. The Puma phone is to be sold in Puma stores as well as through telecom operators, and will first be launched in Europe, with a global rollout to follow. Puma declined to reveal financial terms or sales projections. However, the German active sportswear company said the move is part of its strategy to expand into new categories that complement its footwear, apparel and accessory lines. <wwd.com>


Columbia Sportswear Names Director of Apparel Design - Columbia Sportswear Co. announced that it has appointed Kathleen McNally as creative director for apparel. For the past five years, she served as vice president of design at Lucy Activewear, which is part of VF Corp. McNally brings over 20 years of senior experience in apparel design with several global sportswear brands. At Lucy Activewear, she helped build the brand from a start-up in 2000 to a leader in the women's active lifestyle marketplace prior to the company's acquisition by VF Corporation in September 2007. <sportsonesource.com>


Clothing and footwear deflation increases to 5.7% - Shop prices have fallen on a year ago and were deflationary for the second consecutive month, according to the British Retail Consortium-Nielsen Shop Price Index. Annual non-food deflation was 1.4% in September, unchanged from August. Deflation in clothing and footwear and furniture and floor coverings accelerated compared with previous month. Annual deflation in clothing and footwear increased to 5.7% in September, from 5.5% in August.

The report said that it expected non-food deflation to continue to slow in the coming months until the reversal of VAT in January 2010. Overall, shop prices were down 0.1% year-on-year and remained unchanged from August. <drapersonline.com>


American Apparel gets temporary covenant waiver - American Apparel Inc (APP.A) said it received a temporary waiver of a leverage ratio covenant tied to its $80 million credit line from British private equity firm Lion Capital LLP. American Apparel, which got the waiver from Sept. 30 till Nov. 14, said in a regulatory filing that it might exceed the maximum leverage ratio permitted under the Lion Credit agreement for the year ending Dec. 31, based on its current operating plan for the rest of 2009.

American Apparel had said in March it planned to use the $80 million loan to reduce the balance of its revolving credit facility, to repay a portion of a shareholder note, fund its working capital needs. <reuters.com>


Hilfiger Sues Former Sock Licensee - Tommy Hilfiger has sued its former sock licensee for breach of contract, accusing the manufacturer of missing royalty minimums and threatening to dump merchandise to unauthorized sellers. In a complaint filed Oct. 2 in U.S. District Court in Manhattan, Tommy Hilfiger Licensing alleged that Mountain High Hosiery Ltd. had trouble meeting sales and royalties targets over the course of their agreement, which lasted from 2002 until earlier this year. According to the complaint, the relationship disintegrated in April after Hilfiger declined to approve another acquisition bid by slipper maker R.G. Barry Corp. The deal would have required the brand to reduce its royalty rate by 3 to 5 percent and waive minimum sales figure requirements. <wwd.com>


IT Holding Restructuring Deadline Approaches - After filing for the Italian equivalent of Chapter 11 bankruptcy protection in February, IT Holding SpA will learn its fate in a little more than a month from now, and its prospects look rosy — even if it doesn’t remain whole. Having invited letters of intent at the end of September, Andrea Ciccoli, one of IT Holding’s three government-appointed special commissioners, told WWD he aims to identify potential buyers for some or all of the fashion group’s assets in the next three to four weeks, ahead of submitting a restructuring plan to Italy’s minister of economic development for approval by Nov. 10. The plan may or may not include recommendations to break the group up, he stressed. <wwd.com>


FedEx extends home delivery service via the Postal Service to all retailers - FedEx announced yesterday it is opening up its SmartPost delivery deal with the U.S. Postal Service to smaller retailers. Previously, the program was only open to high-volume retailers that shipped several hundred packages a day. Now there is no minimum order requirement, and any retailer can request SmartPost service when they schedule a FedEx Ground pickup. Packages sent via the SmartPost program are picked up and sorted by FedEx, then handed off to the U.S.P.S. for delivery to consumers’ homes <internetretailer.com>


Fitness Equipment Sales Curtailed by Economy - For the first time in 20 years, overall sales in the fitness equipment industry took a ‘hit,’ but it was not due to any lack of interest in the fitness/exercise category.  According to the Sporting Goods Manufacturers Association’s (SGMA) recent analysis of Tracking the Fitness Movement (2009 edition), the major reason for the dip in sales of fitness and exercise equipment can be attributed to the struggling U.S. economy. While activity at the cash register suffered, participation rates were stronger.  Of the 28 aerobic, conditioning, and strength activities listed in Tracking the Fitness Movement, 17 of them showed an increase in participation from 2007 to 2008.



Barneys to Feature 'SNL' in Holiday Windows - Live from Barneys New York, it’s Saturday Night. For the holiday windows of its Madison Avenue flagship, Barneys is presenting various tableaux depicting memorable “Saturday Night Live” moments culled from more than three decades and filtered through the kooky lens of creative director Simon Doonan. The retailer is hoping that partnering with “SNL” as it celebrates its 35th anniversary will give it a boost. <wwd.com>


Versace to Close Japan Stores, Will Review Strategy - Gianni Versace SpA will close its Japanese stores and review its entire business strategy, as demand for luxury goods declines in the world’s second-largest economy. “The Versace boutiques in Japan no longer represented the brand image and it was felt to be more advantageous for the company to close them and start with a clean slate,” Milan- based Versace said yesterday in a statement. The fashion company has three stores in Japan, according to the Web site. <bloomberg.com>


Nat Nast to sponsor UFL coaches apparel - Nat Nast, which cut its teeth as a bowling shirt brand, has switched allegiances. The company, which has morphed into a luxury men’s wear collection, has inked a deal with the newly launched United Football League to dress its head and assistant coaches. The UFL’s inaugural season kicks off on Thursday. The coaches will wear shirts, pants and shorts from the Nat Nast fall and resort collections that will sport both the UFL logo as well as Nat Nast’s lion emblem. <wwd.com>


Primark improves commitment to living wage for overseas workers - Primark has made improvements to its commitment to paying overseas workers a living minimum wage, according to the third Let’s Clean Up Fashion report published by pressure group Labour Behind the Label. Labour Behind the Label’s annual Let’s Clean Up Fashion report scores fashion retailers based on submissions they make to the not-for-profit organization detailing measures they are taking to ensure overseas workers in their supply chains are not exploited. Primark joined Gap, Marks & Spencer, Monsoon, New Look and Next in scoring highly. All of these retailers demonstrated a systematic approach to wage increase. <drapersonline.com>



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


10/06/2009 10:03 AM


McGough called out buying into a lower price ahead of the analyst day and here we are, higher, into the analyst day! Selling high. KM


US Strategy: Life Down Under

Yesterday, the S&P 500 closed at 1,054, up 1.4% on the day.  The S&P 500’s 2 day rally comes on accelerating volume and a TRADE line breakout - the S&P 500 is now bullish on TRADE and TREND.  


Relative to consensus, a surprise rate hike out of Australia put pressure on the dollar, which put a bid under commodities and commodity stocks.  As Andrew Barber said yesterday “RBA Governor Glenn Stevens sent a clear message today by raising the benchmark rate by 25 basis points despite no evidence of inflationary pressure on the near horizon and stubbornly high unemployment.”  Commodity equities were among the best performers yesterday with renewed momentum behind the REFLATION theme – The XLE and XLB were the two best performing sectors. 

Yesterday’s portfolio moves included selling our long positions in QGEN, AMGN and PSS.   

The dollar index fell 0.5% on the day and the VIX fell 4.2% and is now flat over the past week. 

Four of the nine sectors outperformed the S&P 500, with every sector positive for the second straight day.  The three best performing sectors were Materials (XLB), Energy (XLE) and Technology (XLK), while Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) were the bottom three.  We are currently long the XLV. 

Yesterday, the XLK moved back to positive on both TRADE and TREND. The XLK benefited from the M&A tailwind as EMR agreed to acquire AVCT for $1.2B in cash. In addition, Semis were another bright spot with the SOX +2.1%.


Today, the set up for the S&P 500 is: TRADE (1,042) and TREND is positive (985).   The Research Edge quantitative models have 9 of 9 sectors in the S&P500 positive on TREND and 7 of 9 sectors are positive from the TRADE duration.  Yesterday, the XLI, XLK and the XLB moved back to being BULLISH on the TRADE duration.   
Right now the Research Edge models suggest that there is 1% downside and 1.5% upside in the S&P 500.  At the time of writing the futures pointed to a higher open. 


Howard Penney
Managing Director



US Strategy: Life Down Under - S P500


US Strategy: Life Down Under - s pperf


US Strategy: Life Down Under - sv oct 7

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