• run with the bulls

    get your first month

    of hedgeye free



Our short thesis is predicated on our belief that management does not have a feasible growth algorithm.  This is vital because, if we are right, an aggressive growth agenda will only come at the expense of shareholders.  To get to the heart of the matter, we specifically asked the company about this seven months ago on the 2Q14 earnings call.  Though we had our doubts, the answer, at the time, seemed legitimate:


Q – Howard W. Penney: Thank you for taking my question. As Matt was sort of pressing you on the performance of the current store base, can you go through what the economics are, given sort of the small number of stores in the comp store base and the total number of stores? Can you go through the economics of how you envision this unfolding – the Grille, excuse me -- how you envision this concept rolling out in terms of volumes, margins, and when you think you'll get to a fairly consistent performance? Thanks


A – Thomas J. Pennison: Sure, Howard. This is Tom. From the time we laid this out, we looked at the prototypical Grille was between $4.5 million and $6 million and we really saw a target in that $5.25 million is what our prototype was. So we target internally to be within that $5 million to $6 million AUV.


Within that AUV, we're looking to have a restaurant level EBITDA between 20% and 25%. Now, while we do have more favorable food costs, our cost of sales that our Grille gives us that was spoken to, we give a little bit of that back on our restaurant operating expenses because the lunch day-part has the labor to be a little bit higher as well as some of the premier spots we're utilizing, occupancy can be a little bit higher on that lower base, but that 20% to 25% is – we have been achieving that with the class of 2011 and 2012.


Unfortunately, we had such a large component of the Grille today is relatively new restaurants in a non-comparable group that's not fully visible yet, but we are between that 20% and 25% target for both 2011 and 2012 as well as already approaching that on a run rate with some of the 2013 openings.

Source: Bloomberg


At the ICR conference this past January, management unveiled Grille margins – and they weren’t close to what they’d depicted on the 2Q14 earnings call.




Oftentimes management will say what they need to until they no longer can.  If anything, this is further proof of that.  But our point is – and this should be the biggest takeaway – that Del Frisco’s growth algorithm is broken and the Grille is not ready to grow at such a rapid pace.  We’re trying to call out what no one else will.  The facts are in the chart above.  You can be the judge.

Cartoon of the Day: Lord of the Rates

Cartoon of the Day: Lord of the Rates - Yellen Gollum cartoon 02.25.2015


As Boromir famously said, "One does not simply raise interest rates…"

VIDEO | PENN: A Series Of Bullish Catalysts

Takeaway: Penn National Gaming Inc. was added to Investing Ideas on Tuesday, February 24th 2015.

Earlier today Gaming/Lodging/Leisure Sector Head Todd Jordan sat down with Hedgeye CEO Keith McCullough to discuss the myriad of bullish catalysts for Penn National Gaming Inc.   


The current macro environment, a new casino and a great management team are three factors in Todd's bull case for PENN.



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Takeaway: Overall positive commentary out of NCLH. Pricing raised in last few weeks - a positive takeaway from the discussion




Jason Montague, President and COO Prestige

  • In the past, had acheived $25m total synergies off of $750m revenue base
  • Oceania yields bounced back to 2008 peak yields in 2012
  • Net revenue EBITDA margin should be metric to look at 
  • 50+ years old accounts for 80% of luxury consumers
  • Prestige:  Winter capacity -  Asia/Austrlaia/ French Polynesia/ Caribbean
  • 2015 capacity
    • Regent:
      • Caribbean: 10.9%
      • Europe: 36.0%
      • Alaska: 9.0%
      • Asia/Africa/Pacific: 29.1%
      • S America: 4.1%
      • Other: 10.9%
    • Oceania:
      • Caribbean: 15.7%
      • Europe: 34.1%
      • Asia/Africa/Pacific: 18.8%
      • Caribbean: 15.7%
      • S. America: 5.9%
      • World: 12.2%
      • Other: 8.3%
  • Prestige's visibility into future revs: 20-30% in advance of its industry peers
  • Prestige: only accounted for 1% of premium brand market in terms of passengers - huge opportunity
  • Sees continued double-digit international growth

Wendy Beck, CFO NCLH

  • 2015 guidance excludes Prestige-merger related amortizations in backlog, and customer relations: $101m in 2015, $38m in 2016, $35m in 2017 
  • Pricing raised in the past few weeks
  • Higher MGO grade fuel mix for 2015
  • On IPO call: wanted net leverage ratio below 4x. In 2014, Norwegian brand stand-alone net leverage was 3.8x
  • Longer-term goals:
    • 3-4% net yield growth
    • +30% ADJUSTED EBITDA margin
    • <4x net leverage ratio
    • Adjusted Net income growth: +30%
    • Adjusted EPS of $5.00 by 2017
      • From $2.80 FY 2015 (mid-point)
        • $1.74 from fleet growth  (including newbuilds); organic fleet should generate 2-3% growth
        • $0.13: scheduled interest expense 
        • $0.14- voluntary debt prepayments: $350m baked in 2016 and $440m in 2017
        • $0.19 - fuel hedges in 2015
    • ROIC: Double from IPO level's 7% to ~14% in 2018
    • Assume no share repurchases (if they use the cash to buyback shares rather than pay down debt, it will translate into additional 4 cents in EPS)
  • Weighted debt cost: 3.72%
  • Leverage targets (combined company)
    • 2015: 4.3x
    • 2016: 3.3x
    • 2017: 2.3x
  • ROIC targets (combined company)
    • Payback of Prestige ship: 4.5-5.5yr range
    • ~13% for 2017, 14% in 2018
  • Fuel:  Don't hedge MGO grade
  • Increased fuel hedges to 77% (68% previously) for 2015 currently and 12% for 2018 currently (8% previously)
  • 2014 FX exposure
    • 8% Euro (1 cent change in FX results in 4.3 bps in YoY change in yield)
    • 6% Pound (1 cent change in FX results in 2.0 bps in YoY change in yield)
    • 2% Aussie $ (1 cent change in FX results in 2.1 bps in YoY change in yield)


Takeaway: CEO wants synergies to be implemented quickly - by end of Q3 2015. Possible China opportunity for Norwegian brand in 2018/2019.



Frank Del Rio (President/CEO)

  • Synergies will be done by end of Q3 2015
  • Sold Oceania to Apollo for $475M 
  • Norwegian brand
    • Four 4,200 berth newbuilds on order (Q4 2015, Q2 2017, Q2 2018, Q4 2019)
      • 2018: Breakaway Plus 3 (possibly targeting China)
      • 2019: Breakaway Plus 4 (possibly targeting China)
    • Average age is 51
    • Kids comprise ~12% of passengers
  • Oceania:  new R-Class ship by 2Q 2016
    • Average age: 67
    • Cater to retired/semi-retired seasoned travelers
    • Very high repeat customers
  • Regent Seven Seas
    • Explorer to arrive in mid-2016
    • Most inclusive luxury experience
    • All-suite staterooms, 97% with baloncies
    • High net worth guests comprise 50%+ of volume
    • Average age: 68
  • Oceania: between premium and luxury segments
  • NCLH: has no internal competition within each brand segment (premium, luxury, contemporary) as opposed to RCL and CCL
  • Oceania/Regent: Destination is key
  • Cost per berth
    • Breakaway class: ~$215k
    • Sirena: ~$180k
    • O-Class Oceania: ~$525k (richer cabin mix on O-class)
    • Seven Seas Explorer: ~$600k
  • Jason Montague/Drew Madsen as brand Presidents: primarily responsible for driving occupancy
  • Revenue mgmt department:  focused solely on pricing
  • Oceania/Regent:  have highest per diem in their respective brand segments
  • Cost Synergies in 2015: $25m in the bag
    • $10.4m in consolidation of office operations
  • Revenue Enhancement opportunities
    • Optimize itineraries
    • Shore excursion sales
    • Ticket Price - Deal vs Price marketing message
      • Selling the deal (value) rather than low price
    • Leveraging relationships with Travel Partners catering to affluent travelers (occupancy)
    • Cross-utilization of past guest database (occupancy)
    • Best Practices: maximization of Norwegian's upscale offerings
      • Pride of America
      • The Haven by Norwegian
  • Cost reduction opportunities
    • Sharing of best practices/economics of scale
    • Cost of delivering product
    • Further rationalization of overhead
    • Foster culture of cost consciousness
  • 'FDR's' New Deal
    • Flawless execution of strategy in place
      • Potential of Asia and other new international source markets
    • Drive higher per diems to delivers higher yields
      • Weaving in the Prestige Go to Market Strategy
    • Leverage scale to suppress costs
  • Prestige:  carries 200k passengers/yr; 50% past guest participation on a database of 300k past guest households
  • Norwegian: carries 2.1m passengers/yr; 35% past guest participation on a database of 3.7 million past guest households
  • 'Low hanging fruit' with taking advantage of past guest databases across brands
  • Annualized contribution for Norwegian newbuild: $100m
  • Incremental increase in Norwegian ticket pricing growth necessary to achieve equivalent of newbuild net income: ~3.0% to 4.0%
  • Norwegian waiting for China to mature and waiting to replenish the Norwegian fleet to rightful capacity
  • China:  
    • Looking for China partner
    • Go/No Go decision by Spring 2016
  • Targeting additional $10m for marketing for Wave Season 2015
  • Prestige:  usually 65-75% sold for following year
  • Regent per diem: $700
    • Introduced pre-cruise hotel stay in 2011 which raised pricing
    • 2009-2014 CAGR: +6.8% net ticket yields
  • Top source markets:
    • Oceania:
      • US: 64.7%
      • Canada: 14%
      • UK: 6.2%
      • Australia: 4.0%
    • Regent:
      • US: 67.5%
      • UK: 11.6%
      • Canada: 7.4%
      • Australia: 3.7%
    • Norwegian
      • US: 73.9%
      • Canada: 7.1%
      • UK: 4.2%
      • Germany: 2.2%
    • Norwegian sources 8% in California (vs other brands sourcing 25% in Cali) - sees opportunity there
  • On March 1, 2015,  NCLH will raise bar list by 6.6%, which will generate $10m in onboard revenue with no cost implications
    • More onboard opportunities in medical center. (Norwegian brand loses money in medical center. Want to get to break even)


Drew Madsen (President/ COO)

  • The Haven: Oceania/Regent cross-marketing opportunity
  • Pride of America:  highest yielding ship with strong double digit premium to core fleet
  • Dry dock schedule 2015:
    • Norwegian Star (March)
    • Norwegian Gem (September)
    • Norwegian Epic (October)
  • Norwegian Escape (Nov 2015): largest Haven complex in fleet

Yellen Puffs Dovish Peace Pipe, Bond Yields Fall

The UST 10YR Yield is getting smoked after Fed Chair Janet Yellen takes a toke of the dovish peace pipe, keeping the “patient” word in, and acknowledging what she cannot reverse (#Deflation in all reported inflation metrics). In other words, her acknowledging deflation (without actually calling it that) is what kept "patient" in the vernacular.

Yellen Puffs Dovish Peace Pipe, Bond Yields Fall - Yellen cartoon 08.18.2014

The UST 10YR is at 1.96% this morning and is down -14 basis points lower than just 24 hours ago with slowing CPI and GDP reports (Thursday and Friday) up next.


On a related note, the USD evidently did not like the dovishness either, but the selloff here is modest compared to bond yields. The USD is only -0.2% vs. Burning Euros and Yens. That should put a short-term bottom in for Oil, Gold, etc. And that also helps keep the S&P 500 at all-time highs (both rate sensitive and inflation expectation stocks stop going down).


For the record, Yellen is as dovish, on the margin, as I thought she could be.


*  *  *  *  *  *  *  *

This is an excerpt from Hedgeye morning research by CEO Keith McCullough. Click here for more information on how you can become a subscriber today.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.