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RCL Q4 2014 CONF CALL NOTES

Takeaway: Net yields guidance uninspiring and European commentary a little tenuous

The chart below describes one reason why there was mismodeling for fuel and how the Street missed FX impact.

 

RCL Q4 2014 CONF CALL NOTES - rcl1

 

For your reference, we have reattached our past pricing survey. http://docs.hedgeye.com/HE_Cruise_Pricing_JAN2015_Wave.pdf 

 

CONF CALL

  • On track for Double-Double Program
  • Pleased with Quantum and Anthem - experienced healthy bookings and are large drivers of 2015 results
  • Oasis-class RC vessels and Solstice-class continue to improve on performance
    • That's not new. What about the pre-2006 ships?
  • Guest satisfaction at record levels in 2014
  • SkySea JV will happen in mid-2015
  • All unit cost increases in 2015 is attributable to ramping in China
  • Celebrity:  EDGE ships in 2018/2020
  • Will divest older tonnage as opportunities arise
  • Ended 2014 with best forward booking status in company history 
    • Maybe because of an earlier Wave this year
  • Close-in bookings in F4Q were more sluggish than expected.  Caribbean is the culprit.
  • 2015 Wave:  still early but overall encouraged
  • Once lap 1Q 2015, yield on all products are expected to be up mid-single digits.
  • Capital allocation tools: stock buyback and increasing dividend
  • RCL: 'at the pump' prices have lagged brent prices but have now finally caught up. Also uses inventory on FIFO basis.
  • Typically 4-6wk lag for at the pump prices for RCL
  • 4Q:  2.7% net yields (slower Caribbean, non-holiday price reductions)
    • Onboard rev:  +4.9% (strong sailings on New Year sailings and strong beverage packages)
    • NCC:  better back office costs and crew movement costs
    • Would have come in better than guidance if not for currency, net of fuel 
  • 1Q 2015
    • Caribbean capacity:  up 8% YoY (70% of capacity); promotions stimulating close-in demands.  Quantum performing well but short and 7 night Caribbean itineraries have been challenging.
  • 2Q 2015
    • RCL Caribbean capacity: -2%; industry capacity: -4% YoY
  • 2Q-4Q
    • APDs up YoY due to Australia and Asia
  • 2015
    • Caribbean capacity: up slightly (44% of capacity)
    • Bookings doing very well
  • Caribbean yields: down mid-single digits in Q1, up low single digits in Q2
  • 2015 Europe 
    • Capacity:  +5% YoY;  bookings over last few months are doing well; recent demand have been strong in US and UK bookings; expect mid-single digit yields (but this is influenced by Allure being in Europe this summer season)
      • But what about pricing?
  • 2015 Asia:  15% of total capacity
    • Expect yields up low-mid single 
  • 2015 NCC ex fuel:  +1% or better 
  • Change in presentation:  Pullmantur financials historically been reported on a 2-month lag.  Could change to real-time in 2H 2015 but the effect is immaterial.
  • 1Q 2015:  Higher marketing spending during Wave

 

Q & A

  • What happens to Double Double if FX continues to pressure earnings?
    • Not a new factor. 
  • Everything positive in the last couple of months.
  • Tone is positive. Wave is strong and typical.
  • Oil Forward curve in contango
  • 2015 onboard forecast:  driven by Quantum/Anthem.  O3b technology has helped customer spending on internet packaging. 
  • Expect Alaska pricing is doing well and bookings too
  • Australia:  a lot of capacity going there so there is some stress on yields
  • Value-added vs discounts:  more bundled packages like Celebrity 1-2-3 Go
    • Proving very popular with consumers and travel agents since it increases their commissions
    • Could have a little reduction on onboard revenue
  • Last few weeks in January:  pleased with Wave.  Seeing good volume.  Saw some declines after France attacks but only for a few days.  
  • Europe:  much more balanced view; if they had not seen 2014, they would be euphoric.
    • Right, so really hard comps - Mgmt tone shaky here.
  • European itineraries: 2/3 of European guest come from local economics
    • Shift more sourcing to North America passengers
    • Incremental demand from European customers:  a little bit of dip from Paris tragedy but demand is in-line.
  • CCL/RCL in China - need to educate Chinese consumer.  Overall industry is growing
  • Q4 2014:  more promotional than expected
  • How much did holiday shift added to Q4 yields?  Immaterial (bp point or two)
  • 4Q Other income line:  excluding the $33.5m in tax reform benefits, the rest is TUI's results

BABA: Hammer and Nail (F3Q15)

Takeaway: Only two key themes matter. The mobile hammer is crushing its business, and stalling Tmall mix shift is the nail in the coffin.

KEY POINTS

  1. The Mobile Hammer: BABA's mobile GMV percentage experienced its sharpest y/y growth in its reported history.  In turn, BABA's ad monetization rates got hammered, and its y/y revenue growth in its core marketing segment decelerated precipitously to 19% vs. 32% in the prior quarter.  There will be a lot of sell-side noise about mobile being a long-term opportunity.  It's not, it's a secular headwind.
  2. The Tmall Nail (in the Coffin): The key metric that we were keying in on, and the only thing that was keeping us on the sidelines on the short side was growing Tmall GMV mix shift, which had been propelling Commission revenue growth well in excess of GMV growth.  That sputtered out this quarter, suggesting Tmall mix shift is no longer a secular tailwind, which means its growth prospects are now more dependent on its GMV, which is where we are decidedly bearish.  

 

THE MOBILE HAMMER

BABA's mobile GMV percentage experienced its sharpest y/y growth in its reported history.  In turn, BABA's ad monetization rate (GMV take-rate) got hammered on a y/y basis, and estimated y/y growth on its core marketing segment decelerated precipitously to 19% vs. 32% in the prior quarter. 

 

BABA: Hammer and Nail (F3Q15) - BABA   Ad Monetization 4Q14

 

So why is mobile a headwind? BABA’s ad prices are determined through on online auction platform, which means its vendors set the price. Vendors are not willing to pay comparable rates for mobile ad clicks as they are for desktop clicks.  

 

We suspect the reason why mobile ad rates are lower is because vendors are getting a lower ROI on that ad spend, likely mobile is how China's less affluent access the internet access, and those consumers must be inherently more selective with their purchases.  BABA's own metric suggest as much, with mobile representing the majority of buyers, but the minority of GMV

 

BABA: Hammer and Nail (F3Q15) - BABA  Mobile User   GMV F3Q15

 

Moving forward, BABA's next wave of user growth will come from a less-affluent consumer, meaning the pricing pressure across its core marketing segments will only get worse.  So while there will be some sell-side noise touting mobile as a long-term opportunity, it's because they don't understand who that mobile consumer is.  Mobile is not an opportunity, it's a secular headwind.  See notes below for more detail.

 

BABA: Model Facing Secular Pressure

12/04/14 09:17 AM EST

[click here]

 

BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]

 

 

THE TMALL NAIL (IN THE COFFIN)

The key metric that we were keying in on this quarter was Tmall GMV mix shift, which had been propelling Commission revenue growth well in excess of GMV growth.  

 

The reason is that BABA charges commissions on Tmall transactions, so if a greater percentage of GMV flows to Tmall, BABA has more GMV to tax.  In turn, even if BABA's core marketing segment is under pressure, commission revenues could compensate alongside growing Tmall mix.  That is what has kept us on the sidelines on the short side.

 

However, that sputtered out this quarter.  Tmall GMV mix only increased by 2.6 percentage points y/y vs. its historical tend of 5+ percentage point.  In turn, commission revenue growth slowed precipitously, exposing the weakness in BABA's core marketing segment.  

 

BABA: Hammer and Nail (F3Q15) - BABA   Tmall GMV   F3Q15

BABA: Hammer and Nail (F3Q15) - BABA   GMV vs. Commissions F3Q15

 

In short, we don't see Tmall Mix Shift as long-term secular tailwind.  That means BABA's growth prospects are now even more dependent on its GMV, which is where we are decidedly bearish.

 

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 


PENN: Q4 CONFERENCE CALL NOTES

Takeaway: Strong Q4 bolstered by more than weather. In line Q1 guidance looks very conservative. Release of state Jan/Feb revs should be catalysts

Prepared Commentary

  • Very pleased with 2 new racinos in OH - performing in line with expectations
  • Results exceeded guidance - weather helped
  • Continued focus on delivering improved bottom line results
  • Employee satisfaction scores performing very well
  • Plainridge - 1,250 slots.  on budget and on schedule
  • Jamul on track for mid 2016
  • No new supply entering PENN markets in 2015
  • Optimistic about 2015
  • December was robust: better macro, lower gas prices, easy weather comparison
  • Spend per visit and visitation up - all segments
  • New Zia Park hotel performing well - did see slowdown in December and January due to energy economy
  • Q1:  better weather in January should lead to strong month.  Feb/Mar should be a better indicator of YoY performance
  • Promotional environment remains stable
  • 2015 guidance assumes continued improvement in consumer confidence, lower unemployment, unstable gas prices
  • 5% EBITDAR increase expected with slight decline in EBITDAR margin

Q & A

Sequential margin and EBITDA trends

  • Margin Trends:  consistent YoY and sequentially with the exception of the Ohio racinos which should decline as WPD moderates
  • Seasonality explains the sequential increase in EBITDA
  • Building in some lost table share from new MD casino

Jamul

  • No further obligations 
  • will look to do some interim stage financing before the opening

Rent Expense

  • increase of $13m in 2015 due to Columbus of $3m, OH tracks $13m, offset by Sioux City of $4m
  • No additional rent from MA or CA
  • rent escalation kicked in November 1st

Ohio Racinos

  • still expecting growth
  • happy with margins

Consumer Trends

  • Used the term choppy because December was terrific but November was a mixed bag
  • January looking like December but weather impacted so don't want to say anything more than choppy - Feb/Mar will be telling
  • Can't determine what % of Dec/Jan is due to better consumer but it's definitely something

Energy impact

  • isolated to New Mexico
  • no impact yet on PA, OH, WV and don't anticipate seeing anything
  • No softness in LA or MS

What drove positive Q4 variance from guidance

  • broad based
  • even M Resorts
  • October was good too, November not so much

2015 Guidance

  • projecting slight decline same store revs for mature market properties

Illinois

  • will continue to fight gaming expansion bills

Acquisitions

  • will continue to look at strategic acquisitions
  • still looking at Las Vegas
  • they're at the right leverage (6x including rent) but would go higher for the right opportunity

Slots

  • no change is slot capex or strategy

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KATE – Watch What They Do, Not What They Say

Takeaway: A more confident mgmt. team, killer core biz, closure of non-core dogs, and layup guidance for ’15 gives us a great setup to start the year.

There’s not really a lot more we can say about KATE that the stock move is not already saying. But from where we sit, it is absolutely not over.  It remains high on our Best Ideas list. We think that the company is marching toward $3+ in earnings power – nearly double the consensus. And if we’re right, then we think that KATE will be at $50 at year-end, and has the greatest likelihood of doubling this year out of any retailer or brand. For full details, on our thesis, see our KATE Black Book released last quarter: CLICK HERE.

 

A few big picture points…

  1. Quarter looked astounding. Comp accelerated materially to 28% from 15% in 3Q.  2 year comp accelerated from 23% to 29%. Not many companies in this macro climate have growth accelerating off such a strong base (or any base).
  2. They’re shutting down Jack Spade and Kate Spade Saturday – two non core concepts that have been a big source of contention for the investment community. They can take these stores, and convert into Kate Spade NY. Nice real estate optionality there. This is precisely what we highlighted in our deck last quarter. We applaud management for acting quickly to remedy the dilutive effect of the brands. Our math suggests it was about a $0.20 hit for the year. And took EBITDA margin rate down about 200bps.  
  3. Guidance is a little light for 2015 – only a hsd comp. But let’s face it, this company has zero credibility with guidance. Started off 2014 guiding for 10-13%, and it came in at 26% for the year. Ignore what they say, and focus on what they do. They’ll crush their guidance. Comp: No change to our model for FY15 which calls for high teen comps and EBITDA of $220mm.
  4. E-commerce: Online was an absolute monster this quarter. Assuming that brick and mortar is 80% of the consolidated revenue, that implies that online was up 56%. Consistent with what we saw in the traffic trends coming out of the 3rd quarter and through the Holiday.

 

Below is our latest note, including our check on business trends, most of which were spot-on.

 

KATE – Watch What They Do, Not What They Say - KATE Fin Table

 

01/23/15 08:29 AM EST

KATE - WALL OF SILENCE BROKEN

 

There's a first time for everything. KATE pre-announced that next Thursday it is going to pre-announce. As bizarre as this seems to be, the only negative is that it confirms a severe disconnect between this company's communication strategy vs. the fundamental strength in its business, and the upside to the long-term financial model. 

 

As we stated on January 14th (see below) we welcome a pre-announcement, as it bulldozes the 15 week wall of silence between the start of the abnormally long quiet period and the print. 

 

We think the company's presentation next week will quiet many of the errant bear cases  that have hurt the stock so much year to date. 

 

01/14/15 10:10 PM EST

KATE - RISK REWARD LOOKS SOLID HERE

 

Takeaway: There’s been way too much misinformation on KATE in Jan-to-date. Trends are better than people think. Risk/reward here is outstanding.

 

We think that KATE’s risk/reward on the long side is simply too great to pass up with the stock in the mid-$20s. KATE is down -17.1% since the start of the year (over a whopping 9 trading sessions), vs -1.1% for the XRT due to factors that we think largely have no merit. We think that the brand is extremely healthy, business trends are strong, and the growth trajectory is squarely in-tact. In short, based on the earnings ramp we’re expecting to be evident over the next year, we think that KATE is looking at 50% base case upside from today’s $26.80. That’s $13.50 upside with what we think is about $5 downside – a risk reward we’re more than prepared to take given our view that KATE probably has the best likelihood of doubling out of any US retail name this year.

 

OUR ANSWERS TO NINE DAYS OF INVESTOR CONCERNS


1. Shhhh…. We’ll start with the concern that is the most valid, and that’s the Wall of Silence that emanates from the company. KATE’s quiet period started on Thanksgiving, and it might not report its fourth quarter until the first week of March. That’s about 15 weeks of sheer silence. Seriously, we’re going to see retailers on a January fiscal year report 4Q before KATE does. At this rate, nothing would make us happier than if KATE preannounced. It did so last year at this time – though that was before a series of investor meetings that are not happening this year. With no information coming from the company, investors are taking negative anecdotes and trading the stock down with nobody to answer the many questions that are swirling around. We can give it our best shot, but what we want is a press release out of KATE.

 

2. ‘Excessive Discounting’ in the Department Store Channel. This was what set the stock into its initial spiral. Analyst reports talked about excessive discounting, without a) adding the context of the fact that wholesale handbags account for only 15% of KATE’s sales, b) looking at a balance of discounts for a representative sample of wholesalers over the course of the entire quarter/holiday season, and most importantly, c) without looking at the discounting cadence versus last year. Looking at sequential changes in pricing without considering velocity, inventory, and what trends were a year ago is an otherwise useless exercise. In sum, we did not find anything in any of the reports that struck as valid or concerning.

 

3. Promotions Are NOT Greater Than Last Year. The graphic below shows the promotions in 2013 versus 2014. While there are some variances vs last year, one major point we can make is that there was NOT a more promotional cadence this year online. Rest assured that if KATE’s wholesale sales or store sales were suffering, there would be unexpected sales that would pop up online. That definitely did not happen.  Some subtleties…

  • In 2014 KATE moved the October surprise sale back a week into Nov.  Online traffic started to pick up immediately thereafter (see below).
  • Mid November 25% off offer was 2 days longer this year.
  • This year the Black Friday sales was shorter, but cyber Monday sale was longer.
  • Surprise sale in mid-December was a one day 75% off sale last year, this year it was a 2 day sale but it didn’t advertise any specific discount (gifts $99and under), as KATE shifts away from 70%+ ‘Flash’ Sales.
  • The 25% off sale items started earlier this year, will end up being 20 days vs 11 last year.

EXHIBIT 2: KATE PROMOTIONS VS LAST YEAR

KATE – Watch What They Do, Not What They Say - Kate chart2

 

4. KATE On-Line Presence. We measure traffic trends for about 250 brands and retailers by triangulating many different sources. The reality is that no one source is accurate anything more than 2/3 of the time. But this approach has proven to be a very strong gauge of a company’s business. Could it be that there are excessive promotions driving traffic? No – as we already outlined in point #3 above. If we saw excessive emails promos and accelerating traffic we’d be concerned. No need to be concerned here.

  • Exhibit 3 is the Indexed traffic rank for katespade.com. We re-indexed in June 2014 (blue line) when we hit the YY mark. Not the way we typically look at this metric, but it does a good job accentuating the ramp we’ve seen in traffic rank since mid-October. You can see the divergence in performance compared to last year from July-September which coincided with the comp slowdown we saw in 3Q. Since it is a 90-day moving average the best reflection of the quarter in aggregate is the 12/28 reading – on that date Traffic Rank was up 55% YY.

EXHIBIT 3: KATE INDEXED TRAFFIC RANK

KATE – Watch What They Do, Not What They Say - kate chart3 

  • Exhibit 4 looks at the year over year change in traffic for both katespade.com and michaelkors.com. There is a meaningful divergence between the two starting in Week 22, which, because of the way we indexed, equates to 11/4/14. Week 30 marks the quarter end and as in the earlier chart is the best reflection of the quarter in aggregate because it is a 90-day moving average. The reading on that day was +55%. This is big for KATE with online accounting for about 20% of revenue compared to KORS who set a 2-3yr target to hit 10%. Overall demand in that channel looked very healthy throughout the quarter and especially so during the Holiday selling period.

EXHIBIT 4: Y/Y TRAFFIC RANK – KATE VS KORS

KATE – Watch What They Do, Not What They Say - kate chart4

  • Exhibit 5 shows the YY reach spread for KATE, KORS, and COH – which captures the change in total reach online versus a year ago. Anything above the x-axis is positve, anything below = negative. Trend here is the same as in previous charts though you can see the relative outperformance around Black Friday/Cyber Monday through the holiday in more detail when compared to KORS and COH.

EXHIBIT 5: KATE, KORS, COH REACH

KATE – Watch What They Do, Not What They Say - kate chart5

 


EAT: Tough Crowd

If the market’s reaction to Brinker’s EPS release yesterday is any indication of what’s to come, look out.  EAT, despite delivering a meaningful top line, bottom line, and same-store sales beat, traded down -1.78% on the day.  Suffice to say, expectations are high heading into earnings season and those that underperform will likely be punished.

 

EAT had a strong quarter, but the street was likely disappointed with the lack of leverage in the business model given such strong comps.  Cost of sales, in particular, driven by burger meat, cheese, avocado, and salmon, drove some of the margin pressure in the period – but it was still down 6 bps y/y.  In 3Q15, Brinker will be lapping a very difficult comparison on this line, suggesting that the 26 bps y/y improvement analysts expect  won’t be happening. 

 

Continued sales momentum, labor leverage, and prudent capital allocation should help management offset these pressures, as they maintained full year EPS guidance range of $3.00-3.15, which would be good for 11-16% growth.

 

EAT: Tough Crowd - 1

 

In our view, Chili’s culinary vision (Fresh Mex, Tex Mex) and guest experience (service, Ziosk) initiatives are on point and should help play into the company’s goal of changing consumers’ mindsets around the brand.  This approach is in contrast to that of some casual dining chains that have turned to a promotional/discounting strategy to drive traffic.  While the former may take longer to yield results, it is undoubtedly a more admirable and sustainable approach than the latter.  Whether this approach will even the playing field with fast casual or not is still to be determined, but management appears confident in that assertion.

 

Outside of the well-guided initiatives to drive same-store sales and traffic, Brinker’s capital allocation strategy remains best in class:

  1. Invest in the business
  2. Manage debt levels
  3. Keep some cash on hand
  4. Return remaining cash to shareholders through dividends or share repurchases

With YTD cash flow from operations at $162 million and over $78.4 million of available cash on the balance sheet, EAT’s capital discipline remains an important part of the story.

The Good

  • Revenues of $742.9 beat consensus estimates by 87 bps
  • Adjusted EPS of $0.71 beat consensus estimates by 331 bps
  • Significant same-store sales beats across the board
  • 2% traffic growth resulted in the best two-year average number (+0.1%) since 1Q13
  • System-wide rollout of tabletop technology from Ziosk is complete
  • Reimage program is 95% complete
  • Tabletop gaming revenue and retail revenue led to double digit growth on the other revenue line
  • Revenue from tabletop tablets offsets the cost
  • Significant labor leverage from higher sales and an adjustment to lower employee health insurance expense
  • Maggiano’s posted record high delivery and banquet sales
  • Repurchased 1.1 million shares in the quarter for about $60 million
  • Repurchased an additional 600,000 shares since the end of the quarter for about $36.2 million
  • On the weather front, should provide more upside to comps in 3Q15 than 2Q15
  • YTD cash flow from operations is $162.5 million
  • Ended the quarter with $78.4 million of available cash on the balance sheet

The Bad

  • Cost of sales came in much higher than anticipated due in large part to burger meat, cheese, avocado, and salmon inflation
  • Expect continued commodity pressure, particularly in the third quarter which has a difficult comparison
  • Restaurant expenses came in above estimates due to tabletop device rentals, credit card fees, and higher pre-opening expense
  • Operating margins down 18 bps y/y due to the aforementioned headwinds
  • Facing some headwinds internationally

 

EAT: Tough Crowd - 2

 

EAT: Tough Crowd - 3


MCD: A New Beginning

The first email we received from a client following the news of Thompson’s departure yesterday posed a simple question: “Should I chase MCD tomorrow?”

 

The answer was quite simple as well: “There is no need to chase it.”  The issues at MCD run deep and will take a lot of time to fix.  However, with that being said, we are moving MCD onto the Long Bench of our Investment Ideas list. 

 

As we’ve said many times, the only way to begin fixing McDonald’s was to get a new CEO.  Getting a new CEO is a step in the right direction, but where we go from here is still unknown.

Thoughts on the Announcement

  1. We like the choice of Steve Easterbrook as the new CEO.  We’ve known him for years and believe he is capable of turning the company around.  The first thing he must do is scrap the current turnaround plan and get a fresh start.  Can he, or will he, do that is the question.
  2. The timing of his departure presents some challenges to effecting change in 2015.  The marketing plans and product pipeline for 2015 are firmly in place.  McDonald’s is a big ship that will take a while to turn around.  Nothing will happen in the intermediate-term.
  3. Anything short of massive changes in the way MCD thinks about its current menu and store operations will fall short of the desired results.  This speaks to the mandate Mr. Easterbrook has been given by the board.
  4. The board of MCD is part of the problem the company faces.  The average age of the board is 64 and the average tenure is 13 years.  Andrew McKenna, non-executive Chairman of the Board of Directors, who announced the changes, is 84 years old.  There are two other board members that are in their 70’s.

The changes at MCD must run deep – starting from the board all the way down to store operations.

 

More to come.


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