Bombed Out Buck: Walking The Line

Although the US Dollar Index has backed off its intraday highs (and the SP500 has recovered from its intraday lows as a result), the New Reality is that we have a buck that has stopped burning, for now…


In the chart below, Matt Hedrick and I have outlined both the immediate term TRADE and intermediate term TREND lines:


1.       TRADE (dotted green line) = $76.20

2.       TREND (thick red line) = $77.69


Since bottoming at its YTD low on October 21st, the US Dollar has rallied a full +2%. There is no irony, therefore, that closing highs for the SP500 and the CRB Commodities Index came on October 19th (1097) and October 21st  (284), respectively. As the US Dollar has reflated, the deflation in the SP500 and CRB Index has been demonstrable.


Its critical to note that the US Dollar Index is now Walking The Line (see our Early Look note from 10/29) ahead of a major event – the FOMC decision at 215PM EST tomorrow.


We know what he should do, but we have no idea what Bernanke is going to do, and we don’t think the market does either – that’s why the Bombed Out Buck is trading right on the line that matters (its TRADE line).


What we do know:

  1. If Bernanke panders, the buck is going to burn again, breaking its TRADE line.
  2. If Bernanke signals a change in rate rhetoric, the US Dollar has room to run up to its TREND line.

That’s the best risk management setup we can give you for now.


Stay tuned.



Keith R. McCullough
Chief Executive Officer


Bombed Out Buck: Walking The Line - USDXA



TAST expects its Burger King comparable sales to be positive for the balance of the year.


Carroll’s Restaurant Group (TAST), which operates 314 Burger King franchise units in the U.S., along with 91 Pollo Tropicals  and 155 Taco Cabanas, reported 3Q09 results yesterday after the close.  On its earnings call, management commented that although Burger King comparable sales were running -5% in October, that same-store sales should turn positive for the balance of the quarter. 


Specifically, management stated, “Now been about two weeks since the Burger King $1 Quarter Pound Double Cheeseburger was launched, and while it's still pretty early, we believe that the improvement in sales trends so far indicate that Burger King same store sales should be positive for the balance of the quarter.” 


TAST provided Q4 same-store sales guidance for Burger King of flat to +0.5%.  Based on October trends, management is making a big bet on the $1 double cheeseburger as its guidance implies comparable sales trends will be up about 2.5% to 3.5% on average in November and December.  This sequential improvement, which would be driven primarily by traffic gains, would point to market share gains for Burger King.





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


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.         


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.

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