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CMG – As Good As it gets

CMG reported 3Q09 earnings of $1.08, easily beating the street’s $0.86 per share estimate.  The company’s same-store sales growth of 2.7% came in better than analysts’ estimates as well.  Both restaurant-level and EBIT margins grew in excess of 400 bps YOY.  It was a strong quarter.  Unfortunately, I just don’t see any upside from here. 


Margins should continue to grow in the fourth quarter, though to a lesser degree than what we saw in 3Q09, and will likely turn negative in 2010 as early as the first quarter.  CMG’s same-store sales growth has held up this year relative to its peers, posting positive numbers on top of the 6% growth in the prior year, but results have been buoyed by the 6% menu price increase the company implemented in 4Q08. 


In 3Q09, the 2.7% comp was driven by the 6% price increase, -1% mix and a 2.5% decline in traffic.  So although CMG’s comps have remained stronger than some of its peers, the 6% menu increase has helped to cushion the traffic declines.  CMG is losing guests and market share.  That being said, it is impressive that traffic has not fallen off more in light of the huge menu price increase in this environment.


In the fourth quarter, more than half of this 6.0% price increase is rolling off (leaving 2.5% of price in 4Q and flat pricing come Q1).  Management is not currently planning to implement any additional pricing in 2010 so overall comparable sales growth will begin to move more with traffic growth.  And, as management stated on the earnings call, there is no evidence yet that consumer discretionary spending has returned.  Management guided to flat transactions and sales comp trends in 2010. 

This lack of pricing combined with management’s expectation for low single digit food cost inflation and 2%-3% wage inflation next year does not bode well for margins.  Like I said before, I just don’t see how things get better from here unless, of course, we see a real improvement in consumer spending.


In 2010, CMG currently plans to open 120-130 new restaurants, even with the expected level of openings in 2009.  However, due to the “recent pressure on developers and the corresponding reduction in number of new developments currently available for [CMG] to buy or lease” (as cited by the company), CMG is now pursuing a new real estate strategy.  In the past, the company only opened restaurants in what it deemed “tier 1” trade areas.  Going forward, management plans to still open about two-thirds of its new units in these “tier 1” areas, but due to the limited number of opportunities, it will also pursue what it is calling “A model sites,” which it says are “tier two trade areas which still have attractive demographics typically characterized by lower occupancy costs and develop for a substantially lower investment cost.”


Tier 2 sites are still expected to achieve cash on cash returns in the mid 30% range because the lower development, occupancy and operating costs will offset the lower expected sales volumes.  These new “A model sites” will not pose a problem should they generate the expected returns, but it always concerns me when a restaurant operator appears to be compromising its real estate decisions in order to maintain growth.  The fact that the company said it will pursue as many tier 1 locations as it can implies that they are still the preferred sites so these tier 2 locations signal less discipline on the part of the company for the sake of maintaining growth.  These types of compromised real estate decisions often lead to declining returns.  And, it is typically a bad sign when management teams start getting asked questions about possible sales cannibalization…


We have seen how that plays out and it is not good.


CMG – As Good As it gets - cmgebit


Scary Footwear/Apparel Bifurcation Continues

Its spooky how much athletic footwear sales are lagging behind apparel sales and total retail sales.



Another week down and footwear remains in a steady state of decline while apparel and total retail sales surge. Part of the relative strength in apparel is licensed apparel, as we noted earlier. We’re also seeing strength in cold weather apparel across the board.  Think about it… when it gets cold earlier in the season like we have see recently, you buy apparel, not a $200 pair of snow boots. But even after all the puts and takes, the weak athletic footwear trends are notable in light of strength we’re seeing in other footwear channels (like Payless, DSW, and Department Stores).


Zach Brown

Darius Dale


Scary Footwear/Apparel Bifurcation Continues - 1


Scary Footwear/Apparel Bifurcation Continues - 2


Scary Footwear/Apparel Bifurcation Continues - 3

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

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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



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