• Executing on asset recycling program
  • Sold $1.6b of assets in 2014 at 13x EBITDA
  • Accelerated plan to sell almost all of limited service hotels in Q4 due to favorable conditions
  • Grown market share in limited service - grown number of properties by 50% since IPO
  • Owned portfolio continues to evolve to stronger, higher quality, and more strategic hotels
  • Pulled 4 more hotels off the market
  • Return of capital - in Q4 repurchased $215m in stock, most were class A purchased in the open market
  • $69m more repurchased in Q1 through last Friday
  • Q4 earnings came in below expectations due to: 1) $22m in non-recurring stock comp expense, 2) transactions - $8m negative impact for Q4 adjusted EBITDA, 3) $3m negative Fx impact, 4) some weakness in international hotels
  • Stock comp should run $2-3m per year going forward
  • Occupancies are at record level in United States
  • Group revenue would've been up 3% if you exclude 3 problem markets - don't see the Q4 problems persisting
  • Group should continue to recover in 2015 and beyond in US
  • Eurozone underperforming except UK
  • Middle East saw drop in inbound from Russia
  • Eastern Europe not good
  • Weak market conditions in HK and Seoul
  • Margins in Americas higher than elsewhere:  up 50bps vs down 240bps
  • Excluding Seoul, margins would've been flat YoY on owned
  • F&B revs were flat despite higher occupancy driven by a handful of hotels - should track RevPAR over time
  • NYC - 2 Hyatt hotels in the comp base
  • NYC represents 9% of adjusted EBITDA
  • 9 hotels in total in NYC
  • Big supply growth will continue to negatively impact those hotels
  • Hyatt Centric - full service lifestyle brand. First ones will open in Chicago and Miami in Q2. Should have 15 by year end.
  • 2015 - 1/3rd of business is outside of the USA. 2015 EBITDA could be impacted by $20m of Fx versus in 2014
  • $70m negative EBITDA impact on 2015 due to H being a net seller in 2014 - $25m in Q1 and Q2 and $20m in Q3
  • By year end, 20% of hotels will have been open less than 3 years



  • Q4 timeshare is a good run rate since sale was early in Q4
  • NYC is primary destination for inbound traffic from Europe - started the year weak but compare is tough (Superbowl last year)
  • Centric will have 3 ownership structures - Hyatt owned, Hyatt managed, and franchised
  • Will continue to use balance sheet to fund growth
  • No time pressure on redeploying asset sale proceeds for 1031 purposes
  • No CFO update
  • Sees active transactions market continuing - Hyatt will be active on the buy and sell side
  • 2015 should be as active as 2014 on the transactions front - while H was a net seller in 2014, they don't know on which side they will come out
  • Will look at property purchases, management deals, and brand acquisitions
  • Tax rate for 2015 mid to high 30s%
  • Most of the capital for new Centric's will be more related to signage and promotions
  • Owned and lease margin decline of 50bps is a comparable so asset transactions did not have an impact
  • RevPAR and profits will be positive in Seoul sometime this year
  • 4 deals pulled off the market - price, contract structure, capital commitments into the hotels, other development opportunity are the 4 criteria looked at
  • India has been under pressure for 3 years but negative progression is slowing - new government and lower oil prices are helping
  • Slowdown in development in India
  • China - no real slowdown in hotel development
  • NYC down 20% in RevPAR to start the year - outlook for the year is still positive though
  • Franchise fees up 35% in 2015 - conversions, new franchise hotels, same store growth


Takeaway: Mgmt focused on raising Prestige synergy targets on the cost and revenue side. NCLH should outperform in 2015


  • 2014:  strong Europe/Alaska offset promotions in Caribbean
  • Synergies:  certainly will achieve cost synergies of $25m
  • Investing in marketing initiatives to stimulate demand via TV in 1Q 2015.
  • Broke 2M guest mark for 1st time in Norwegian history.  
  • Harvest Caye:  serve anchor for Western Caribbean itineraries beginning in Fall 2015
  • Norwegian Escape bookings in-line with expectations and well ahead of Getaway/Breakaway
  • Regent:  free air transportation, free shore excursions, dining, premium wine spirits, free internet.
  • Oceania/Regent:  target  customer base: net worth of $1m, age >55
  • Oceania/Regent:  44%/51% were repeat guests
  • Prestige:  97% cruise experience met or exceeded expectations
  • Sirena:  $40m drydock in March 2016 
  • Prestige:  Ebola impacted exotic sailings.
  • Norwegian brand:  increased booking activities in 2016 with Explorer had slight negative impact as it relates to 2015 bookings
  • Prestige:  Booking velocity negatively impacted by announcement of NCL/Prestige combo.  Customers saying they will wait until booking on Prestige. But that has reversed course since Frank assumed role of President/CEO.
  • Experienced $10.3m fuel derivatives loss in 2014 (5 cents/share)
  • Leverage ticked up to 5x as a result of acquisition...will be below 4x in the next 18 months
  • 1Q 2015:  tough comps; promotional environment in Caribbean will continue
  • Fuel derivative loss for Q1 and 2015:  $35m or $0.15 EPS; $120m or $0.52 EPS
  • 2015 capacity on a combined basis vs 2014 on a Norwegian stand-alone basis:  
    • Caribbean: 40.4% (47.9% in 2014);  Norwegian-only brand: 45.5%
    • Europe: 22.8% (20.7% in 2014)
    • Bermuda/Alaska:  7.5% each (unchanged from 2014)
    • Hawaii: 5.3% (6.4% in 2014)
    • Asia/Africa/Pacific:  3.3%
    • South America: 1.6%
  • 1Q deployment:  
    • 67.9% Caribbean (72.1% in 1Q 2014): Norwegian only brand 74.1%
    • Europe is flat YoY at 11% 
    • Asia/Pacific 7.4% (unchanged YoY)
    • South America 1.9% (unchanged YoY)

Q & A

  • Bookings volume pickup recently:  across all brands.  Norwegian brand saw most pronounced spike.  Norwegian has a good promotion in the market (focused on delivering more value, rather than low pricing).
  • Q1 2015:  pressures in the Caribbean continuing
  • Q2/Q3/Q4 2015: no area of concern:  Europe and Alaska is shaping up
  • Are there more cost synergy opportunities? Probably.
  • Prestige:  highest per diem in industry
  • Scale opportunities are tremendous. 
  • Have not had a Regent newbuild since 2003
  • Slightly above $5.00 for EPS 2017 target
  • 2013 ROIC:  7%...will be in double digits in 2015.  In 2018, will double to 14%.
  • Lower commissions/other line:  fundamental changes in cost of sales structure. Changing agreements in casino, port agreements and lowering air subsidies.  There will continue to be ongoing improvements.  Prestige costs are higher since they operate in an all-inclusive business but there is room for cost improvement.
  • Commissions/other line: Norwegian running at 15% clip. Prestige in the 30%s. On a consolidated basis, should anticipate upper end of 18% range.
  • Regent:  could take a new ship every 5 years
  • Think there are ways to keep Apollo on board
  • Sourcing from other markets:  Fx aside, biggest opportunity international
  • If Norwegian is able to source same # of guests internationally that Prestige has done, Norwegian can generate an additional 210k passengers a year 
  • With Prestige acquisition, want to get back to hedging at 50% 
  • 2016 bookings at best levels ever at this time of year
  • Seeing shipyards being less aggressive in pricing than in 2009/2010 


Last week we elevated a number of troubled growth stocks to our Investment Ideas list as shorts.  Among these was NDLS, a name we see approximately 35-45% downside in with a fair value of $14-16 per share.


NDLS is a small cap stock that has been the recipient of an unwarranted premium growth multiple.  With only ~440 Noodles & Company restaurants system-wide, management maintains that they have a tremendous runway of growth ahead of them that calls for “at least” 2,500 restaurants nationwide.  This is a lofty goal, by any measure, particularly when considering the recent surge of competitors claiming similar domestic growth profiles.  We’ve already seen signs of how difficult this will be to achieve in NDLS’ infancy as a public company.  As the company has accelerated unit growth and ventured into new markets, system-wide sales and margins have suffered.


While this is to be expected, the company believes it is facing a brand awareness issue and thinks it will solve this issue through increased marketing spend and its catering initiative.  In our view, NDLS' brand awareness problem shouldn’t be management’s top priority.  In fact, elevating brand awareness will not be the panacea most hope.  Execution and site selection are the real deterrents to the business, and these can’t simply be fixed by plowing more cash into advertising.


Despite bullish consensus estimates, we believe NDLS is facing a difficult 2015 for the following reasons:

  • Cost of sales inflation: management is only estimating 2% food inflation, but durum wheat prices are under pressure and food cost estimates could head higher as we move into the back half of the year
  • Geographic concentration: the company has a notable number of stores in the DC metro area, which is an extremely competitive market
  • Rising labor costs: 52% of company operated restaurants are in markets that are facing minimum wage increases in 2015 or 2016 (or both), the majority of which are coming this year
  • The Affordable Care Act: will add about 30-50 bps of pressure on margins in 2H15
  • Estimates are high: the street is looking for 27% EPS growth in 2015, after an essentially flat year in 2014

Management is currently guiding to between 20-25% EPS growth in 2015.  With very little flow through from same-store sales, NDLS needs to drive 3-4% comp growth in order to keep margins flat versus last year – a task we feel will be difficult to achieve. 


The biggest factor working against us on the short side is the amount of short interest in the name (~25%).  The analyst community is rather divided, with a 60%/40% split on buys vs holds, respectively.


Consensus Estimates for 4Q14 Look Aggressive As Well

As a part of our process we continually monitor consensus estimates for each of the major line items on the P&L for the vast majority of companies in our space.


In regards to NDLS, we have a difficult time understanding the rationale behind the street's estimates for COGS and, subsequently, restaurant level margins in 4Q14.  


Consensus expects cost of sales to decrease 41 bps on a YoY basis in the quarter, after increasing 51, 67, and 64 bps in 1Q14, 2Q14, and 3Q14, respectively. We've tried, numerous ways, to reconcile the extent of this sudden reversal - but to no avail.  Predictably, this leverage is expected to flow through to restaurant level margins which consensus expects to be down 36 bps YoY, after decreasing 127, 200, and 230 bps in 1Q14, 2Q14, and 3Q14, respectively.  


We think there is a material disconnect here which will become readily apparent if NDLS does not put up a well-above consensus comp.




Data: Company Filings, Consensus Metrix Estimates



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Takeaway: Delivers solid 2015 guidance (ex Fx) and outlook. Best in class stock (in our opinion) no longer cheap but should be a grinder.



  • Q4 2014
    • Led by Europe and US REVPAR  (6.9%, 6.8%, respectively)
    • Strong balanced growth in group and transient segment
    • Drive leisure demand in non-peak periods
    • Government grew 7% 
    • Transient grew 7%
  • Americas/owned group segment: up mid single digits for 2015
    • 50/50 (volume/rate) contribution
    • Pace has been very strong - up 57% YoY in 1Q.  
    • Middle quarters doing well
  • HLT as STR leader:  global rooms under construction, pipeline size and system rooms
  • HLT:  REVPAR index premium of 15%
  • HLT: Rooms under construction make up 19% of global share
  • Americas:  signed on average one deal/day
  • 400 Hamptons in the pipeline.  Will have hundreds of Hamptons in China
  • Doubletree:  doubled in size since 2007. REVPAR index increased over 700bps since 2007
  • 2 new brands in 2014:  Curio (5 hotels opened with 23 hotels in pipeline); Canopy (15 hotels in pipeline; expect to open 1st Canopy within the year)
  • Waldorf sale 1030 exchange:  screened for high-quality properties in urban/resort markets
  • 2015
    • >75% of Adjusted EBITDA comes from US.  Some disruption from weather....sees mid-to-high single digit REVPAR growth in US (strength in San Francisco, Florida, Boston, Washington, offset by ongoing challenges in NY)
    • Mid-single digit REVPAR growth in Europe; strong group business in Southern region.  Russia pressuring Eastern Europe. France underperforming.
    • Mid-to-high single digit REVPAR growth in Middle East
    • China:  6-8% REVPAR growth.  Overall Asia:  high single digit REVPAR growth in 2015
  • Effective franchise rates continue to increase: 4.65%
  • Timeshare: Lower SG&A, higher transient rentals, and lower club charges
    • Continue to transition to capital-light business
    • 60% of sales from new timeshare intervals (different from competitors)
  • Calendar shifts somewhat tempered growth in November
  • Some markets saw group revenue increase 15-25%
  • Hawaii Q4 REVPAR: 10%
  • Strong transient business in DC
  • Transient strength in Brazil and Argentina offset softness in Puerto Rico
  • Europe:  strong group business in UK and Rome 
  • China:  weakness in Mainland group business
  • Paid down $300m in term loans.  Leverage ratio currently at: 4.2x
  • Leverage target: 3-4x
  • Will start returning capital to shareholders via dividend when they reach leverage goals
  • Over 80% of adjusted EBITDA in US $
  • Expect $35-45m FX impact on 2015 EBITDA guidance
  • Remaining Waldorf money (~$100m): will purchase 1 or more US assets in next 6 months


Q & A

  • 2015 Europe:  continue to see strength in Western Europe/ some Southern Europe tempered by weakness in France and Eastern Europe
  • FX impact:  no impact on inbound business to US 
  • Will consider other options on returning capital to shareholders (i.e. stock buyback) but dividend likely first
  • Lodging cycle: Demand is growing with historical low level of supply. US getting better, will drive strong transient results. Group is coming back. 
  • REIT spin-off:  constantly looking at real estate to maximize value.  Don't see 'meaningful arbitrage opportunity' at this moment.
  • Timeshare:  80% is capital light.  Have active loyal customers. Like their timeshare business. 
  • Most of development in US is in limited service and franchising
  • China 2015 REVPAR: in Q4 2014, REVPAR was 3% due to hotel specific issues. For 2014, it was 6%. Expect similar growth in 2015.  Starting to see F&B ease up a little bit (govt austerity). Seeing ancillary spend recover a little bit. Signed more deals in 2014 than 2013 (much more limited service).
  • 2015 incentive fees (ex 1x items):  high teens growth rate
  • US incentive contribution rate:  High 50s (moved from low 50s). Expect in 2015 to move to low 60s
  • 2014:  Lower-end outperformed upper-end by 100bps due to transient growth
    • 2015:  roughly equal growth rates in lower-end and upper-end (UUP and higher)
  • New York EBITDA exposure:  going from 8% to a little less than 5% after Waldorf sale
  • Waldorf transaction/exchange:  REVPAR growth rates will be high single digits higher, EBITDA will be double digits higher
  • Finished at historic high in occupancy in 2014.  Do not think it will be another high in occupancy in 2015.
  • 6-7% HLT supply growth is even split between full service and limited service
  • Probably no more arbitrage opportunities in the portfolio similar to Waldorf, unfortunately
  • Would never say never on buying a brand but economics suggest organic growth the better option.
  • 60% of Fx hit is to the fee business
  • Corporate negotiations are becoming more of seller's market. Free WiFi not really related to that

How Nike Is About to Revolutionize the Shoe Industry (Again) | $NKE

How Nike Is About to Revolutionize the Shoe Industry (Again) | $NKE - nk


Takeaway: This seems a little bit odd, but after we re-read this article a few times, it made perfect sense. Nike is about to revolutionize the way we design, manufacture and buy sneakers. FlyKnit technology is a big part of that. In other words, a shopper could go into a store, design a shoe, grab a burrito at Chipotle, and come back an hour later and leave with the brand new custom shoe that was assembled in the back room.


How Nike Is About to Revolutionize the Shoe Industry (Again) | $NKE - 222


This is one of the only industries where we haven't seen any major disruption to the typical wholesale model in at least 40 years. Nike is starting to push the envelope on that front.


We identified how important customization was to the 18-24 year old demographic, with 100% of customers who shop for athletic footwear online saying that the ability customize was the reason why. One of the problems with consumers designing shoes is that they can't see the end product. Now, with this patented technology, consumers can put on a pair of goofy glasses and design 3D shoes in store.


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Editor's note: This is a brief excerpt from Hedgeye research courtesy of our retail sector team led by Brian McGough and Alec Richards. Click here to learn more about how you can become a subscriber to America's fastest-growing independent financial research firm.

Keith's Macro Notebook 2/18: USD | UST 10YR | Sentiment


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

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