• run with the bulls

    get your first month

    of hedgeye free


COLM: Key Callouts into the Print

This 4Q number is not a slam-dunk. But its outlook should be less conservative than we usually hear from COLM. There are still issues here…but things might be aligning to start 'going their way.’



COLM is a tough one heading into this quarter. We all know their shtick…blow away the quarter, but guide down.  I’m not sure we’ll get that this time. In fact, we could get a bit of the opposite.  Why? There’s not as much wiggle room to smoke this quarter. On one hand, the company is keeping order trends very tight, and is not producing enough to beef up its ‘at once’ business. So revenue should track backlog fairly well. That means top line down close to double digits, but it also means less volatility on the gross margin line. But on the flip side, last quarter COLM ended with +8% growth in inventories, and -15.5% revenue/backlog growth.  That’s not exactly a bullish 3Q GM setup either. 


The saving grace this quarter? Outerwear has started off on a very positive note, as has winter-related sportswear. Blame it on the weather, but either way, it’s a fact. The maps below are tough to argue with. When we layer a little cold snap on top of lean inventories at retail (COLM will have cleared out its inventory by qtr end), the brand’s performance at retail inflecting to the upside, and FX finally reversing – we’re setting the stage here for backlog to begin to creep higher with bullish Gross Margin implications for FY10.


The stock is still largely hated, with 1 Buy, 3 Sells, 7 Holds, and 23% of the float short. Fundamentally, I think that this company has problems with how it approaches branding as it perennially has too many ‘huge opportunities’ for its content (i.e. never realized due to poor execution or lack of capital commitment). In other words, it is at the mercy of the market, instead of the other way around.  But the reality is that COLM will go through 1-2-year stretches where things just ‘go its way.’  This might be the beginning of one of them.


COLM: Key Callouts into the Print - COLM REV SPORTSCAN




COLM: Key Callouts into the Print - 10 22 2009 11 37 29 AM


Like clockwork, HOT beats the quarter and lowers guidance.  Management's reassurances of benefitting from the eventual recovery weren't enough to save the day.





General Commentary:

  • Continued to see better results as they moved through the quarter.  Results are improving by the week
  • Dramatically cut back on their costs, but realize that they can't save their way to prosperity
  • They will hold the line on costs while focusing on driving revenue
  • St. Regis NY was sold out for 50% of the nights in September 
  • While occupancies are starting to creep back, it's unclear when rate will recovery.  It's typically two quarters after occupancy turns positive



3Q09 Results & Outlook:

  • I love how he says that they are able to beat consensus each quarter through cost controls... how about by lowering numbers each quarter and setting a low bar???
  • Think that international, FX, and luxury & upper upscale concentration will soon again become tailwinds instead of headwinds
    • We agree on international and FX especially
  • China is recovering nicely, as RevPAR gets less bad
  • India is one of their weakest markets but they are optimistic in the long term
  • Latin America was negatively affected by H1N1; their owned Mexican properties were down 40%+
  • North America is slowly getting less bad, Europe is doing a little better
  • Given the continued pressure on rate, they are preparing for a difficult 2010
  • Points out that owned portfolio has fallen so far that it will be a big source of upside when things recovery... of course who knows when that will be
  • Timeshare - deliquencies stabilized around 4%, tour flow down
  • Cost cutting
    • Full year SG&A around $400MM.  Majority of cost cuts came at corporate and in NA & European regions with emerging markets left largely uncut
    • Leveraging account coverage over more properties
  • SPG is also driving their topline, think that they generated $100MM of incremental revenues by incentivizing more visits to their property through deals and promotions
  • Spoke at length about the Sheraton relaunch, maybe it's just me but it seems like they've been "renovating" this brand since I began covering lodging circa 2001
  • Decided to complete Bal Harbour, but won't be doing any other new builds like this going forward
  • 2010 will likely be another challenging year, but will greatly benefit from a recovery - Stating the obvious...cyclical businesses do this. Although the more asset light they become the less leverage they will have on the upside
  • Continue to focus on selling assets and liquidating their timeshare inventory (shrinking the business), and becoming more a brand/fee company



Balance sheet/other:

  • Leverage ratio was 4.3x and there will be no major maturities until 2012
  • Securitization markets have improved markedly over the last 6 months
    • They will be in the market this quarter to complete a securitization deal
  • Hope to close some asset sales in the 4Q (I believe he said $125MM)
  • Think that they will achieve their goal of $3BN of net debt by year end
  • IRS tax refund is delayed to 2010 now




  • While the fact that things are getting better (i.e. less bad) is undeniable, pace of recovery is uncertain
  • Rate of recovery is strongest in Asia ex-India
  • Mexican economy remains one of the weakest markets in Latin America
  • North America - rate accounted for most of the RevPAR decline
  • RevPAR at company operated hotel is tracking down 16% QTD
  • Focus now is entirely on improving rate realization
  • VOI close rates are improving while pricing is very weak
  • Gains from any securitization are not included in guidance...they will likely beat next quarter with the help of this gain though...
  • Group business on the books for 2010 is lower than the low levels they had on the books last year
  • 2010 will be all about business booked for the year and that's very difficult to predict
  • Corporate rate negotiations have just gotten underway and they hope to hold rates flat while customers hope to get a discount to '09
    • Just a reminder corporate rates do not mean guaranteed room nights - just indicative. 
  • Think that MEA will be up a little, in Latin America they expect flat-to-modest growth, NA probably down 5%, and Europe better than US but still weak in 2010
  • Expect that owned hotel RevPAR growth to be a the low end of their guidance range
  • FX should help RevPAR but not margins (no it has the opposite effect on margins)
  • Timeshare - will lose roughly $30MM of interest income, and pre-FASB changes they will have a decrease of EBITDA in timeshare, but post changes they will benefit by $25-30MM in EBITDA.  They will operate the VOI business for cash, meaning that they will only expend capex to finish projects in sellout.  May look to cancel future projects/stages of existing projects and/or lower pricing on products (like MAR) and will probably take a write off charge in 4Q
  • SG&A is expected to increase as they start paying bonuses again and give modest raises to stay competitive in a recovering market



  • Pricing for group in 2010/2011 is down but there isn't lot on the books at this point
  • What is normalized capex for next year?
    • Hotel maintenance capex in line with this year
    • Timeshare will just be completion of what is underconstruction
    • Bal Harbour - $330MM to complete - but it's not all going to be spent in 2010
  • Thoughts on assets sales from a pricing perspective, and appetite to unload more assets
    • They want to continue to selectively sell assets - especially non-core assets
      [Just a quick reminder that unlike in the past, these assets are not likely to retain HOT flags in a sale]
    • See more money available for deals than a few months ago and expect that trend to continue if capital market trends continue
  • Sheraton revitalization
    • Unclear what that means re: RevPAR
    • Pace of deflaggings should slow in 2010
  • Bal Harbour - what is the rational for completing this development?
    • As the economy starts to rebound, and more than 50% of their current buyers there are international, they think that the demand will be there
    • The incremental capital required to complete the project was small vis-a-vis cash from closing
  • Owned Margins under various scenarios
    • Think that they will be able to cut a little more cost than they can cut at the hotel level next year
    • Just as an aside, we have noticed that some luxury hotels are no longer providing services such as turndown. In our opinion, this is ok if we're paying $119 to stay at the WYNN but not ok when prices come back
    • However, if RevPAR is down 5%, then margins will decline 250 bps (wow... we think it's a lot more than that, especially given that RevPAR declines are going to be rate driven)
  • Their RevPAR guidance isn't really based on GDP expectations, but rather on trends
  • What was the $9MM increase in "Other Management & Franchisee fees"?
    • FX gains? I think it's a lot of termination fees
  • Think that NY will be a faster recovering market
    • This is because occupancy in NY is around 90% and small changes in occupancy amount to huge changes in rate, since pricing power is all about being close to sold out.  This market always has higher volume
    • China is also expected to recover faster
    • Luxury and Upper Upscale is expected to recover/get less bad faster given that they fell the farthest
  • Any impact of MAR dropping pricing on their residential pricing?
    • Unclear but they certainly indicated that they may be doing some of this as well
    • A large part of MAR's write down was also in fractional and international which HOT doesn't really have
    • Haven't seen a palpable impact from MAR's move
    • Advance rates and interest rates on timeshare are better than they were last time around, so there will likely be gains but don't know how much
  • New franchise agreement for St. Regis?
    • It's a one-off situation
  • Pipeline?
    • Internationally they continue to see robust growth
    • In NA, the hotel financing environment is still very challenged since existing assets are trading at a lower price per key than the cost to build
    • Are in discussions with capital partners to manage distressed assets that the partners may want to acquire
  • Brand standards?
    • Starting to look at standards across brands as a way to save money, and only retain unique things about each brand


October will remain positive on Global basis


Europe and APMEA continue to be strong


With U.S. flat to slightly negative (lapping tougher comp and not taking pricing)


So they don’t see change in underlying trend




1 year and 2-year trends based on different assumed Oct results



Yesterday afternoon a mentor who taught me a tremendous amount when I was his assistant many years ago sent me an email pointing out the following:  At less than 20.25 yesterday morning, the VIX reached a new '09 low and a new 14 month low; but the Nov futures continued to trade at 23.90 - a premium of 3.65 to cash.  Furthermore, the maturity curve for VIX futures had steepened sharply in recent weeks. All of this would suggest that futures traders are anticipating increased volatility as we head into year end.


As you can see in 2 charts below, over the longer term anticipated future equity volatility extrapolated from the options market (VIX) has typically exceeded realized volatility, while long dated futures on the VIX have typically traded inside a tight range of the underlying index. In the late spring of this year, that relationship started to resume after the extraordinary volatility of the second half of 2008 severely distorted the “normal” relationships. In recent weeks however, these relationships has begun to distort in the opposite direction, with the VIX declining less than realized volatility while the resilience of longer dated futures prices suggests that futures traders are anticipating a resumption of higher volatility in the coming months.






The VIX options market meanwhile is sending more mixed signals than the futures. November calls are trading at a pronounced premium to equivalent puts. This makes a good deal of sense as the upcoming weeks prior to expiration straddles the remaining earning cycle –with the VIX at such low levels recent historical standards, the calculated bet that earnings surprises could spark a rebound in volatility does not seem farfetched. At least one investor may be taking a contrarian   view however, even as the VIX rebounded sharply in the second half of yesterday’s session a persistent buyer appeared, gobbling November 22.5 strike puts in unusually large size (this following heavy activity in November and December puts in earlier sessions –see chart below). Whether this buying actually represents conviction that volatility will continue to decline, or if it is simply a hedge executed by a trader with heavy long exposure, is a matter of conjecture.   




From a quantitative standpoint, our model identifies 25.20 as a VIX TREND line, and we expect that volatility is more likely to rise in the near term as earnings are digested fully. On the longer term, looking into year end and beyond, there does not appear to be any obvious catalyst that would be capable of driving the VIX north of 30 for a sustained period  (despite increased M&A activity).  We watch volatility in the options markets closely for signals, and as the data changes we change. This divergence intrigues us, but we have not yet drawn conclusions that would support an investment thesis.



Andrew Barber




As I said going into the quarter, I think MCD’s reported September results will be the primary driver of the stock’s performance today.  I was wrong on the direction though.  September comparable sales growth came in better than the street’s expectations across the board and MCD reported 3Q09 EPS of $1.15 relative to the street’s $1.11 estimate so the stock is moving higher. 


Relative to my own expectations, the U.S. came in surprisingly strong, up 3.2%.  On a 2-year basis, this implies trends that are about even with what we saw in June and August.  Investors were not happy with what they saw in June and August (MCD traded down in reaction to both sales releases), but people were expecting continued deceleration in September and that did not happen.


In Europe, MCD reported 6.9% same-store sales growth in September, which came in better than the street’s expectation but light relative to my expectations.  Based on the ranges I laid out in my September sales preview, I view this 6.9% number as BAD because it points to a 160 bp sequential slowdown on a 2-year average basis.


APMEA’s reported 5.3% same-store sales growth beat both consensus and my expectations by the biggest magnitude and relative to my ranges, is a GOOD number because it signals an acceleration in 2-year average trends.  On a 2-year basis, this September result does not point to a return to the 7%-plus 2-year trends we saw earlier in the year, but it does show sequential improvement.




Like a broken record, Starwood beat and lowered again. Contrary to current Street projections, HOT pointed to lower 2010 margins and EBITDA.



HOT reported Adjusted EBITDA of $179MM, $4MM above the high end of guidance and the Street, and adjusted EPS of $0.14, $0.04 above the high end of guidance and Street. As has become customary, HOT lowered guidance for the following quarter.  New Adjusted EBITDA guidance of $190-$200MM or full year guidance of $735 to $745 is below the $750MM they guided to last quarter.  Would anyone be surprised if after the Street lowers their numbers for next quarter, HOT comes out and beats again?


Starwood missed our estimates by $2MM on Adjusted EBITDA but beat our Adjusted EPS estimate by $0.02 given the artificially low 7.1% effective tax rate resulting from a reversal of deferred taxes.  Using a "normalized" tax rate of 28%, we estimate that HOT's Adjusted EPS was really $0.09 for the quarter.  If we use their numbers and tax away the $10MM tax reversal, which isn't recurring, we come up with $0.08. In any case, we realize that no one attaches much significance to EPS, so let's move on to the details of the quarter.



Owned, Leased, and Consolidated JV

  • Revenues came in $3MM light of our estimate but HOT more than made up for the revenue weakness with tighter cost control
  • ADR for Owned hotels was 2% lower than our estimate, while occupancy was 3.5% better. 
  • The change in mix shift away from group was evident in the 34% y-o-y estimated decline in F&B revenues
  • Total COSTPAR (total expenses per occupied room) decreased 13.5%, compared to 8.3% in 2Q09, which was certainly impressive


Management, Franchise Fees, and Other Income

  • Fee income came in $3MM below our estimate, with the entire miss attributable to lower incentive fees
  • Management, Franchise and Incentives fees ("real fee income") were $124MM, down 23% from 3Q08
  • Managed & franchised rooms grew 4.4%, adding 11,216 rooms y-o-y to the system
    • Growth in managed and franchised rooms was roughly 2,200 rooms light of our count due to more hotels exiting the system and possible delays in announced openings
    • New brands contributed 5,103 of the room addition, or 2%
  • Across the brands, ADR results came in below our estimates (by roughly 2.5%) while occupancies came in better, net RevPAR declines were only 40bps below our estimate
  • The "junk" (deferred gains/ termination fees/ and bliss revenues/ etc) was flat year-over-year, hence management comment of fee income only being down 17%
  • Amortization of deferred gains was $21MM, same as last year, we suspect that the other $11MM in "Other Management & Franchise Revenues" consisted mostly of termination fees
  • Bliss and other miscellaneous revenues were $25MM, down 26.5% from 3Q08




  • Came in largely in line with our numbers
  • Originated sales declined slightly less than we expected but deferred revenues were a lot higher, bringing down the net number
  • Originated sales margins where higher than our expectations, so net operating profit of $24MM was $2MM better than our estimate



Other details

  • SG&A was $8MM higher than our estimate, as HOT neared the end of its cost containment efforts
  • Starwood's effective tax rate was only 7.1% in the quarter due to some tax reversals.  Since this is clearly not a normalized number, we wouldn't use it to calculate "Adjusted EPS"
  • Starwood stopped providing a RevPAR breakdown for "other systemwide" hotels which we thought included some of the new brands and non-branded properties



4Q09 Guidance

  • As we already mentioned, the mid-point 4Q09 guidance is below Street numbers and below Starwood's guidance given last quarter
  • RevPAR guidance was left unchanged
  • EPS guidance was lower
  • D&A guidance was tweaked down a bit, due to asset sales and write-downs
  • Everything was roughly the same



2010 Outlook


" While business conditions have clearly stabilized, it is very hard to forecast the pace of recovery, especially rate. While group bookings have picked up for 2011 and beyond, booking pace for 2010 has continued to lag below 2009. And booking windows for both transient and group business have shortened considerably. As such, late breaking business is a larger
component of what will drive our performance next year making forward looking predictions four quarters out particularly challenging."

  • SS Company Operated WW Hotel RevPAR expected to be flat to down 5% (same as MAR's guidance) in local currency (FX will help though)
    • US and Western Europe are expected to be at the lower end of that range and emerging markets are expected to be at the high end
    • At current exchange range, HOT estimates a 2% benefit to reported RevPAR
  • Management and Franchise fee growth is expected to be in line with RevPAR growth
  • RevPAR at SS Owned WW Hotels also expected to be flat to down in local currency (and 200 bps better in current dollars)
  • Margins at owned hotels will likely be DOWN
  • Timeshare origination sales are expected to be flat, but interest income will be down assuming that Starwood can complete another securitization sale in 4Q09.  However, under the new accounting rules, timeshare operations will get an estimated boost of $10-15MM with no associated cash flow benefit
  • Most SG&A increase
  • Possibly more asset sales


Adjusting for the timeshare we expect Street numbers to come down (again).  Consistent with our 10/15/09, Street margin expectations for 2010 were too high.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.