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Beat on costs but forward commentary not so rosy.  Oasis bookings seemed disappointing.





General commentary/Outlook

  • Folks are continuing to vacation and the value proposition of a cruise continues to resonate with customers
  • Unfortunately, they are also seeing more seasonality than before, and giving back the strength they saw in the 3Q09 in 4Q
  • Real key to their future is the leverage they will have from the cost cuts when things recover
  • Proactive in approach of managing fuel risk
  • Well positioned to ride out what's left of this cycle and take off when things begin to recover


3Q09 results

  • H1N1 cost them about 2% points of yield in the quarter, with the Caribbean the strongest and Alaska the weakest
  • Non-US guests made up 43% of customers
  • International market performed particularly well
  • Took a charge of 3 cents per share on the Pullmantur sale and the acceleration of dry docking expenses
  • Correction to the statutory tax rate related to the purchase of Pullmantur
  • Beat this quarter came from better close in bookings



  • Early signs of expansion in booking curve but still contracted in comparison to historical norms
  • Looking out to the summer of 2010 they are encouraged by peak season demand
  • Mexican Riviera demand is still disappointing
  • Pricing since the beginning of October is running ahead of last year.  However, the improvement is mostly driven by easier comparisons
  • 4Q09 is being hurt by Florida's weak economy and more discounted holiday pricing. 
  • Looking out to 1Q2010, bookings have outpaced the same time last year but cumulatively they are still behind last year. However, they expect to surpass that given the accelerated booking pace
  • 2010 rates compare favorably to 2008 but that is influenced by the fact that the newer boats have much more bookings for 2010 than the older boats, hence the comparison is not apples to apples
  • Believe that they will have better yields in 1Q2010 then 1Q09 due to mix shift towards newer boats and less dramatic discounting
  • FX will have a 1% benefit for net cruise yields in 4Q2009


Sourcing detail

  • Expect to source more than 40% of business outside the US in 2010
  • Australian product expected to be up y-o-y, other emerging market products unclear
  • Oasis of the Seas is more significantly booked for 2010 than any other ship and has a large price premium - Not discounting
  • Had healthy close in demand for cruises in Europe and booking volume through the fall have held up well
  • In Caribbean they are seeing a high number of bookings come from outside the US on longer sailings, in general Caribbean performed relatively well
  • Reaction of the UK market to the Eclipse has been exciting



  • Expect that both 1Q2010 and FY2010 will have positive yields
    • Yield accretion due exceptional performance of new ships and less dramatic discounting that they undertook during the Lehman collapse
    • Oasis will have double digit premiums versus the Freedom class
  • Color on legacy core fleet/cannibalization
    • Feel like they don't really have cannibalization its more that developmental markets that take some time to develop (because presumably they move old supply abroad)
  • Given the variability in short term bookings how are they so confident that yields will be positive?
    • Because the build in bookings have been consistently above 2008
    • They realize that the reason is because the further out bookings are weighted towards the "premuim" newer ships but as they get closer in, sales will be more weighted towards "legacy" products
  • Atlantic Sky (Sky Wonder?)  which was scheduled to go to Mexico got "laid up"
  • Given that yield guidance came down - surprised that EPS guidance isn't worse for next quarter
    • Costs are slightly better than before, and new bunker guidance is probably less then most people had modeled
  • Lower load factor in Dec than last year? Are you they holding back inventory to protect pricing?
    • Always had the intention of reducing capacity given how new the ship is and making sure they can smoothly handle the volume
    • However, they are also protecting pricing by being less aggressive in filling the ship
    • They think it's possible that load factor can be down this next quarter as a result
    • Don't want to sell out the Oasis - that would be "yield mismanagement" - want to maximize yields
    • Oasis should have above average fleet occupancy next year since many of the rooms are meant to room up to  4 per berth - family gearing
    • Management seemed surprised that the Oasis bookings weren't stronger.  Did they price too high in this environment?
  • Not seeing a lot of H1N1 incidences on their ships now 
  • Increase in fuel utilization wont be a big number next year
  • Taking down 4Q09 yields from -4.5% to -7 to -8%, how much of that is due to what they have seen to date vs fear of what they would see in Nov/Dec?
    • Pressure in the state of Florida was a surprise for them and there is a skew towards Florida in 4Q09
    • Surprised by additional discounting that they had to do on Christmas cruises. Apparently Christmas falling on Friday is a negative too - I guess people don't like to leave on Christmas
  • ROI on new ships?
    • Don't comment on individual ROI for ships but think that they will have "enormous" returns
  • What % repeat cruiser
    • A little more than one third of their customers are new cruisers, but the discounts have also incentivized repeat cruisers to come more often. So net net no real change in mix
  • Booking volumes being up 40% from 4Q08 when the world came to a halt shouldn't be surprising ... so its an odd comp.  Compared to 20087/8 they have slightly better booking pace but part of that is that they also have more supply
  • Curves in terms of bookings patterns should have less peaks and valleys than a year ago
  • What is the rational for going into "newer" markets if they are weak and taking longer to ramp
    • Lots of those newer markets are strategic
    • Also they need a place to move "legacy ships" otherwise there's that whole cannibalization issue
  • Also why is the Holiday period weak? Should it be peak?
    • Christmas pricing is higher just not to the historical standard, also the timing of Christmas doesn't help
  • Have seen an indication towards a 15-30 day expansion in the booking window (like CCL) but too early to say now
  • Had a pretty good quarter for onboard revenue. Saw healthy consumption of internet and phone and excursions, but gambling and art consumption still weak
    • Not really seeing an improving trend - pretty steady



Included below is interesting commentary on Diedrich’s 10-Q filing yesterday from Michelle Leder at footnoted.org:


Late yesterday, Peet’s Coffee & Tea (PEET), my personal favorite when it comes to caffeine delivery devices, announced that it was buying Diedrich’s Coffee (DDRX) for $213 million.


Coincidentally, Diedrich’s filed what’s likely to be its last 10-Q yesterday. But what’s surprising was the very first exhibit in the 10-Q: an agreement with CFO Sean McCarthy. Now, McCarthy was named CFO back in January 2006. But the agreement was dated May 1, 2008 and was filed yesterday — roughly 17 months after it went into affect.


We don’t mean to be sticklers here, but what was the hold up with getting this into a filing? By our count, Diedrich has filed 4 10-Qs and 2 10-Ks since May 2008. Even if we assume that it was a typo and May 1, 2008 was really May 1, 2009 — not that that makes sense, but we’re going hypothetical here — there was still a K and a Q that they agreement could have been included in. The agreement itself confirms “in writing” the terms of a change in control, so presumably McCarthy had been working for the past three years under some sort of informal — or at least, non-written — understanding.


Now maybe it’s just an odd coincidence that this agreement was included on the very day that the company announced it was being acquired. But that’s a bit hard to swallow — kind of like coffee that’s been sitting in the pot for too long.


Michelle Leder



This is one for the record books; 93% of the purchase price is goodwill!


Last night it was announced that Peet’s (PEET) will buy Diedrich (DDRX) for $26 a share or $213 million.  Shockingly, of the $213 million purchase price, $200 million is goodwill.  The last time I saw something this outrageous was when Wendy’s purchased Baja Fresh and we know how that ended!


Using the estimates on Bloomberg, the purchase price is about 17x calendar 2010 EBITDA.  In June 2009, DDRX reported full-year EBITDA of $2.8 million, with full-year estimates of $9.7 and $15.2 million for the years ending June 2010 and 2011, respectively. 


Diedrich competes with Green Mountain (GMCR) in the single serve “at home” segment of the coffee market.  Peet’s is paying a significant premium to get into that segment of the market and is making a big bet that current growth rates will continue for many years.  On the conference call last night, management seemed desperate to get into the single serve category.  Maybe desperate is a strong word, but management suggested that if it did not do this deal now, it would be missing something. 


Given the massive amount of goodwill, the deal is dilutive to 2010 earnings.  PEET’s original 2010 guidance assumed the company would earn $1.25 per share on $330 million in revenues and $44 million in EBITDA.  The 2010 pro-forma estimates for the combined companies are $440-$460 million in revenues, $62-$64 million in EBITDA and $0.80-$0.90 in EPS.  Given last night’s close of $34.50, PEET is now trading at 38x calendar 2010 pro-forma EPS.  As a point of reference, GMCR is trading at 44x NTN EPS estimates. 


I understand the growth at GMCR, DDRX and the “at home” segment has been a moon shot for the past two years.  The success of this acquisition of DDRX by PEET is dependent on that growth continuing for many years to come.  If not, the company will be eating that dilution for years to come.


To justify the acquisition, PEET’s senior management put together a business plan that appears to be on the aggressive side.  The estimates that management put out there do not appear to assume any slowing of the current trends in the “at home” segment of the coffee category.  For 2011, revenues are expected to be between $550-$580 million, EBITDA $98-$103 million and EPS of $2.00 to $2.20.  Management specifically cited cost savings and revenue synergies for the increase in revenues and EBITDA.  At the low end of the range, management is looking for a $33 million increase in EBIT on a $110 million increase in revenues.    


While the cost savings could definitely be real, the revenue synergies are more suspect and put at risk the aggressive assumptions if there is a slowing of the trends in the “at-home” segment of the market in the coming years. 


This acquisition could prove problematic in the coming years, but right now, it does not make sense to fight the wave of growth facing the key participants in the “at-home” segment of the coffee market.         

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RCL beats the quarter due to better cost controls but lowers 4Q09 outlook. Was Q3 an anomaly for RCL and leisure?



RCL beat it's EPS guidance and the consensus estimate of $1.03 by $0.04. However, the beat was all cost driven versus expectations and the outlook for 4Q09 was disappointing.


Despite company yield guidance of -16.5% for the quarter, most people (including ourselves) were modeling something better.  Better Q3 yields were already consensus.  RCL missed revenues expectations but better cost controls saved the day once again.  Specifically, commissions & transportation, onboard & other, and payroll all came in slightly below our estimate, while marketing came in a little higher.


Lower yield outlook for 4Q09 was particularly disappointing given that RCL should benefit from the reversal of the FX drag.  Lowering guidance one quarter out but "reiterating" 1Q2010 positive guidance puts RCL's credibility and visibility into question.  So does on the margin negative commentary regarding pricing and close-in bookings.  We remain cautious on the consumer.



Highlighted Commentary from the Release


  • Like many other travel companies, we saw more strength than we expected during our peak season but have been experiencing more pricing pressure on some of our traditionally softer fall season sailings... Overall though, the business environment is largely unchanged and stable. We expect the yield deficit to continue to improve in the fourth quarter and we remain optimistic that 2010 will bring year-over-year yield improvement.
  • While the pricing environment is still not what we'd like it to be, we're pleased to see solid growth in our order book and a rapidly diminishing gap in year-over-year booked volume comparisons
  • The company expects fourth quarter Net Yields to decline approximately 7% to 8%, slightly worse than its previous forecast of down mid-single digits... As a consequence of the weaker economy in the state, we do not anticipate the same strength of close-in bookings in the fourth quarter as we saw in the third quarter.
  • For the full year the company maintained its projection for Net Yields to decline approximately 14%, or 12% to 13% after adjusting for changes in currency.
  • The company affirmed its earlier outlook for year-over-year improvements in net revenue yields in the first quarter and for the full year of 2010.


Our macro math suggests declining discretionary spending over the next 5 quarters.  It could be even worse for casinos since their share of the discretionary wallet is already on the decline.



GDP = C + I + G + (EX – IM).  While the G may be expanding, C probably won’t.  Discretionary sectors are likely to see a smaller and smaller proportion of the consumer’s “wallet” over the next year or so.  As shown in the table below, our macro forecasts and healthcare cost projections indicate that 2010 will bring an accelerating drop in non-essential consumer spending, culminating in a $124 billion year over year decline (-11.4%) in Q3 of 2010.  Q3 2009 is looking more and more like an anomaly which makes it a very difficult comparison.  Due to leisure spending, both lodging companies and the cruiselines reported better than expected Q3 revenues.  For all of 2010 Research Edge projects a 5.2% decline in discretionary consumer spending. 






Despite GDP growth and the market rally since March, unemployment continues to increase.  As we have written about at length recently, gas prices are also going to negatively impact consumers’ spending power for the remainder of 2009 and into 2010.  For consumer spending on casino gambling and hotels, in particular, our post, “WHAT GOES UP…” (09/10/2009), shows that gaming is in a mean reversion period in terms of a percentage of personal consumption expenditure.  Gaming was strongly levered to the fifteen-year rip in housing-fueled PCE that ended in 2008.  A one-two punch of a smaller allocation of a more frugal consumer’s wallet could meaningfully impact the gaming industry’s top line next year.





While everyone gears up for Sales Day, here are some bigger picture points that we’ve picked up on in days that further highlight the changing industry landscape.




Some Notable Call Outs


  • As the world watches the success and growth of online retailers such as Amazon, one must take a look at Ebay’s latest venture for the holiday season. For a limited time beginning November 20th, Ebay will open a pop-up store in midtown Manhattan selling apparel, cosmetics, electronics, toys, and home products. The offering appears to be in partnership with a small list of well recognized brands looking to drum up some “buzz” over the holiday season. Are online retailers recognizing that they need a physical presence as well? Probably not, but this is certainly noteworthy.


  • With the buzz building around the Dollar General IPO, I wanted to highlight a retailer that we’re sure to see come public over the next couple of years. Five Below is the latest incarnation of the “dollar store” model, with all items priced between $1-$5. The retailer focuses on trend right products primarily for teen and tween consumers (ranging from candy to electronics). The chain currently operates 102 stores, and expects to double by the end of next year. It’s amazing how much better merchandising can be when pricing expands five-fold to $5!


  • I prefer not to recycle the news, but the latest data point out of Japan’s Fast Retailing unit, UNIQLO, is worth repeating. The company, which is predominantly anchored in Japan, but has one store in NYC, just reported a 36% increase in same-store sales for October. The company’s value priced basic merchandising offerings (think Gap) mixed with a small amount of fashion product (this month launched J+, a collaboration with Jil Sander) is resonating with consumers across the globe. Given this success, and the recent line out the door in Soho during the J+ launch, it will not be long before UNIQLO looks to build a bigger presence here in the US.



  • We love quantifying things at Research Edge. But occasionally we’ll take note of something that takes us into the dreaded ‘qualitative’ analytical zone (if there is such a thing).  Here’s an observation… We all know that over the past several years retailers have become more efficient with inventory management which is some ways has resulted in lower-risk, better executed seasonal transitions.  So with Halloween now over, the biggest and most important transition is about to be underway.  Or is it?  I have been noticing what I’m calling the “Christmas Creep”  lately.  This is merely the phenomenon where retailers are setting Christmas displays, decorations, and merchandise even before Halloween was over.  Traditionally, Thanksgiving and Black Friday have marked the official beginning of the holiday season.  Not so in 2009.  I’m not sure if creating an in-store atmosphere really induces early holiday shopping or just annoys consumers.  To me it seems that an extra month of in your face holiday marketing and hype might lead to “holiday fatigue”. 


With anecdotes still coming out of WalMart surrounding pronounced payroll cycles, do retailers really expect these cash strapped consumers to step up and get their holiday shopping done before the Macy’s Day Parade?  Offensive, goofy, or simply a case of trying too hard to give people a reason to shop, one thing is sure.  The longer holiday merchandise sits out there, the more risk ensues that some retailers will become impatient and pull the promotional trigger.  And if you’re totally confused by all of this, just dig through your recycling bin to find last weekend’s circulars which included holiday kickoffs from Best Buy, Target, and Toys R Us. Happy Holidays!





WTO Report Shows Global Exports Holding Ground - Apparel exports have fared better than other types of consumer goods during the global financial downturn, according to a recent study from the World Trade Organization. Global apparel exports showed “a mere 2.1 percent decline” during the fourth quarter of 2008, said the report, marking the only contracting quarter of the year. Between January and September, the value of exports grew 4.6 percent to $362 billion. China showed strength during the last quarter of the year, with the value of its apparel exports rising 10.9 percent. The country was ranked as the world’s top apparel exporter last year, with shipments up 4 percent to $120 billion. China’s exports to the U.S. were flat at $28.5 billion, but exports to the European Union spiked 23 percent to $39.8 billion. <wwd.com>


Stanley, Black & Decker to Combine on Fourth Try in 3 Decades - Stanley Works agreed to purchase Black & Decker Corp. yesterday for $3.5 billion in stock after on-and-off talks that spanned almost three decades. The companies discussed combining three other times over about 27 years, Black & Decker Chief Executive Officer Nolan Archibald said in an interview. Stanley Works’ offer values Black & Decker, the maker of DeWalt power drills and Price Pfister faucets, at about $57.57 a share, or 22 percent more than yesterday’s closing price. <bloomberg.com>


Steiner Agrees to Buy Bliss for $100M - Steiner Leisure Ltd. has agreed to acquire Bliss World Holdings, Inc. from Starwood Hotels & Resorts Worldwide Inc. for $100 million, a divestiture that will allow Starwood to focus more closely on its core hospitality business, the firm stated Monday. The deal, expected to close on or before Dec. 31, calls for Steiner to purchase all the issued and outstanding capital stock of Bliss. The acquisition is expected to be slightly accretive to Steiner’s 2010 earnings, according to the company, which operates spas and salons on 126 cruise ships and in 51 resort spas and two luxury day spas. <wwd.com>


Amazon Closes Zappos Acquisition - Amazon.com, Inc. completed its acquisition of Zappos.com. Thanks to an increase in Amazon's stock price, Amazon will pay $1.2 billion, or $117.4 a share, for the business,  up from $928 million when the deal was first announced on July 22, 2009. As expected, the Zappos management team will remain intact and the company will continue to operate as a wholly-owned subsidiary with headquarters in Las Vegas, NV. In a letter to employees entitled "It's official!," Tony Hsieh, CEO, Zappos.com, wrote: Earlier this year, on July 22, we signed an agreement to join forces with Amazon. As I mentioned in my email to employees at the time, we plan to continue to run Zappos the way we have always run Zappos -- continuing to do what we believe is best for our brand, our culture, and our business. <sportsonesource.com>


Luxury apparel retailer leaps in Hong Kong debut - Shares of Trinity Ltd. jumped in Hong Kong on their first day of trading Tuesday, with investors drawn to the stock on the basis of its association with global brand supply-chain manager Li & Fung Ltd. Trinity's shares ended the morning session at 2.69 Hong Kong dollars (35 U.S. cents), up 62% from its initial offer price, after trading as high at 82%. The company -- a retailer of branded menswear such as like Cerruti 1881, Gieves & Hawkes and Kent & Curwen -- raised $96 million in its initial public offer last month. <marketwatch.com>


With CIT in Bankruptcy, Industry Holds Its Breath - The pressure is still on at CIT Group Inc. Even with the filing of a prepackaged Chapter 11 bankruptcy petition in Manhattan federal court Sunday, serious questions remain about the lender’s business, which is responsible for about 60 percent of factoring volume to the U.S. apparel industry — including the status of new contracts. And a sale of the factoring unit, considered CIT’s crown jewel, cannot be ruled out. <wwd.com>


Study Predicts Online Holiday Sales Boost - A Forrester Research Inc. report predicted Monday that online retail sales in all categories except travel will reach $44.7 billion during November and December, an increase of 8 percent over 2008. Relatively slow sales following the collapse of Lehman Brothers and the freezing of the credit markets in October last year make it easier for retailers to show strong growth this holiday period, the report acknowledged. In addition, the number of consumers saying they plan to buy products and services online this season increased 2 percent to 94 percent this year. Among retailers, 72 percent said they expect an increase in sales in the period. <wwd.com>


Best Buy to Open Online Store for Movies With Sonic Solutions - Best Buy Co., the world’s largest electronics retailer, will start an online store for movies and television shows that will compete with Apple Inc.’s iTunes. The service will use technology licensed from Sonic Solutions Inc., according to a statement today from both companies. Sonic’s Roxio CinemaNow system will be installed on televisions, computers, Blu-ray players, set-top boxes and mobile phones sold by Richfield, Minnesota-based Best Buy. The digital video store expands Best Buy’s foray into services, helping the company increase customer loyalty, Chief Executive Officer Brian Dunn said in the statement. <bloomberg.com>


Escada Insolvency Proceedings Begin - Insolvency proceedings over the assets of Escada AG were opened Sunday at the Munich Municipal court. The acting insolvency administrator, Munich attorney Christian Gerloff, now has the power of administration and control over all assets and the power of representation of Escada. The company filed an insolvency petition on Aug. 13. <wwd.com>


Brazil: Leather exports down 48% in value - Brazil’s hide and leather exports brought in US$ 791 million in export revenues between January and September, down by 48% compared to the same period a year ago. However, the Brazilian Tanners Council (CICB) has pointed out that exports have been slowly recovering and increased by 10% in volume terms during September 2009 compared to the month before. The organisation also said that a higher proportion of leather exports are now leaving Brazil as crust or finished leather, meaning that Brazilian tanners are adding more value than before to their country’s raw material. <fashionnetasia.com>


Hong Kong: Retail sales growth back on track in September - Hong Kong's retail sales in September grew by 2.4% year on year to HK$21.4 billion, according to the Census and Statistics Department of the Hong Kong SAR government. After netting out the effect of price changes over the same period, the volume of retail sales increased by 1.0% year on year in September. "The retail sales reverted to a small year-on-year increase in September after falling for seven consecutive months, in tandem with a further improvement in local consumer spending and also the revival in inbound tourism," a spokesman said. <fashionnetasia.com>


Textile Plan in Pakistan Founders - Despite the support of the All Pakistan Textile Mills Association, the country’s new five-year textile policy hasn’t been implemented after three months. The initiative focuses on gas and electricity supply, full refund of past research and development claims, availability of 5 percent export refinancing, relief on long-term loans and tax free import of machinery. <wwd.com>


Jordan Addresses Alleged Abuses in Garment Sector - Jordan instituted reforms of its labor laws and strengthened its labor compliance and monitoring over the last year in an effort to address concerns about alleged abuses in the country’s apparel sector, the minister of labor said Wednesday. Gazi Shbaikat, Jordan’s labor minister, and a delegation of officials from the Ministry of Labor unveiled a progress report and met with industry executives and U.S. officials last week to detail the country’s labor reform efforts in the apparel sector. <wwd.com>


Dick's SG to Open First Store In Washington - Dick's Sporting Goods plans to open its first Washington store at South Hill Mall in Puyallup next spring, according to the Seattle Times. The 60,000 square feet store covers space previously occupied by Circuit City and Linens 'n Things. It had been empty since the two chains closed all their stores in the past year. Helped by it's acquisition of Chick's Sporting Goods, Dick's SG operates now has 15 stores in California. It has one in Oregon, with six more locations there "coming soon," many of them for Joe's Sports locations. <sportsonesource.com>


New York & Co. Sues Penney's Over Ads - New York & Company Inc. has asked a federal court to halt a J.C. Penney Co. Inc. ad campaign that it says infringes on its own. In a lawsuit filed last week in U.S. District Court in Manhattan, the New York-based specialty retailer alleged that Penney’s “NYC Style” slogan treads too closely to the “NY Style” tag line it has used since August 2008. <wwd.com>


Lucy Celebrates 10 Years - Lucy Activewear, a division of VF Corp., will celebrate its 10th year in business this month.To honor the anniversary, the brand is launching a contest inviting customers to share their inspiration. Customers can enter on the lucy Facebook wall at www.facebook.com/lucy and/or via e-mail at . The top entry in the video category wins a $500 shopping spree and the leading essay entry wins $250 to spend at lucy. <sportsonesource.com>

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