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HOT should report a decent Q4 and provide more detailed guidance for 2010. We still think the Street has the margins wrong.



2010 Overview

In many respects, we are not far off the Street’s expectations for 2010.  Our revenue estimate of $2.68 billion is probably a touch higher than most estimates.  For management & franchise fees and other, we are projecting $660 million, in-line with the Street.  Where we differ is in the owned & leased hotel category but not with revenues – we are at $1.53 billion.  Rather, the Street’s margin projections appear too high and we’ll tell you why.


On October 22, 2009, HOT guided 2010 RevPAR for company owned hotels worldwide to fall 0% to 5% in local currency.  In US $s, guidance was 200bps higher given the exchange rate on that date.  The dollar has moved higher since then which will be a bit of a drag from the guidance number but not that germane to our discussion.  Given where the industry is in the cycle, room rates will undoubtedly be negative in 2010 if HOT’s RevPAR guidance proves accurate.  Since room rates are almost pure margin, it is inconceivable that margins will be flat, as predicted by the Street.  We wrote about the margin flow through of rate versus occupancy in our 10/15/09 post, “LODGING: HISTORY REPEATS”. 


For 2010, we are projecting $699MM of EBITDA and $0.41 of EPS compared to consensus of $730MM of EBITDA and $0.57 of EPS.  Below are some of our assumptions vs. management guidance.




  • Guidance of 0 to -5% for WW operated hotels and 200bps higher on a dollar basis if FX rates stayed at 10/22 levels
  • We have FY2010 RevPAR of -1% (FX impacted) assuming down ADR and positive Occupancy
  • Our Owned RevPAR is down 20 bps but margins are down roughly 300 bps given that FX will also impact costs, higher occupancy and flat constant currency cost per occupied room assumptions



Management, Franchise fees and Other Income

We estimate a 9.5% decline y-o-y, mostly due to the $80MM+ of “Other” Bliss revenues.  Below are our assumptions:

  • Base fees + 5%
  • Incentive fees down 2.5%
  • Franchise fees + 7.5%
  • Amortization of gains & termination fees down 3%
  • Bliss & Miscellaneous income -74%




  • Timeshare will be negatively impacted by new FASB rules (see our note on 10/26/2009 “LODGING: BETTER TIMESHARE ACCOUNTING”)
  • SG&A should decrease almost $80MM just as a result of the Bliss sale, so let’s see how much “net” cost inflation creeps back into pay and bonuses.  We’re only estimating 2% which gets us to $326MM 
  • Interest expense:  Realistically HOT will need to redo its bank facility early next year, despite the extension which gets them to Feb 2011 (otherwise they become current).  While HOT should be able to keep very little drawn on the new facility given the capex reductions and cash generation from liquidation of timeshare inventory, the new facility will likely come at a materially higher cost.  Ignoring this, and assuming the draw is de minimis, we estimate net interest expense of $220MM in 2010.

R3: NKE -- The Next Burst is Near


January 13, 2009


It’s time for investors to get NKE on the front burner. The next ‘burst’ is near.





We’ve made no secret over the past year that we really like what Nike is doing to reposition the organization for its next ‘burst’ of growth, but simply that the repositioning effort is a 12-18 month effort that was tough to get too far in front of.  There are two things that have changed since we made this call repeatedly last year: 1) Time, and 2) Our increased confidence that the new organization is beating to the same drum to crush the competition. The bottom line is that we finally think that it’s time for investors to get NKE on the front burner. The next ‘burst’ is near.


Check out the chart below. It shows the 4 distinct bursts in the stock over the past 25 years where the stock doubled or tripled. The end of those periods usually are marred with stories in major newspapers or magazines noting the end of Nike as we know it. They’ve been wrong every time. People usually don’t step back and take the big picture into context on this name.


R3: NKE -- The Next Burst is Near - NKE Stock Price


If you want to clip an occasional 20% return in either direction, you can usually trade Nike based on noise around futures, anecdotes from retailers about new product launches, or gaming the usual ‘beat and guide down – only to beat again’ nature of how management sets expectations. If you want to do that, then be my guest. But that’s not the real juice to this story.


The real question is what will drive the next wave of growth, can the org chart handle it, and is it in expectations or not? This is a name that I study pretty darn closely, and have the highest degree of confidence in out of any name out there as it relates to really understanding bigger picture.


The key to growth will unquestionably be layering the category focus over deeper geographic penetration to get Nike’s on feet of the next wave of the 5.6 billion people it currently does not touch – and synching up apparel to gain traction where its performance has been average at best in recent years.   Can the org chart handle it?  Having recently spent time with management, I must say that it’s been a while since I’ve seen such cohesion in the growth plan. The answer there is ‘Yes’.  Is it in expectations? If we’re going to measure ‘expectations’ by consensus estimates – then the answer is No. Next year (May ’11), I think the Street is low by 20%.


In the meantime, can you get cute and trade ebbs and flows in futures, and momentum building up through the Olympics (not a huge deal), World Cup (much bigger deal), and what we think will be a turn in the retail landscape for athletic footwear in 2010? Sure, of course you can. A bigger kick should be the product acceleration out of Nike as we cycle the layoff period experienced in Feb-May 2009 when there was extreme uncertainty inside the organization, and productivity took a hit. We’re living with the fruits of that today given the 6-9 month lead time on much of Nike’s product. Since May, productivity and morale picked up meaningfully, but we have yet to see it in the numbers yet. Dial the clock forward 6-9 months from then. You do the math…


We should be in full swing from a revenue momentum standpoint by mid-summer. That’s when the people that did not start doing the work today will have to answer the question as to why they ignored the story.


There’s many layers here – more than can fit on a simple summary like this. Let us know if you’d like to discuss.





Target zeros in on its team of e-commerce platform builders - It’s going to be a busy year for Target Corp. as the multichannel retailer lays the groundwork for launching its own e-commerce site by the start of the holiday shopping season in 2011. Target, No. 20 in the Internet Retailer Top 500 Guide (a PDF version of the company’s financial and operating profile can be ordered by clicking on its name), announced yesterday several of the vendors it has engaged to build Target’s own e-commerce platform. Target announced last year it would move off of Amazon.com Inc.’s e-commerce platform. Amazon, which has provided Target’s e-commerce platform for several years, will continue to support Target.com until the new Target site is launched. Target will utilize Sapient Corp. as its chief systems integrator and will build the new Internet infrastructure on a WebSphere e-commerce platform from IBM Corp. and database software from Oracle Corp. Endeca Technologies Inc. and Autonomy Corp. will provide applications for site search and content management, respectively, while Sterling Commerce Inc. will supply the site’s order management capability. Huge Inc. will provide web site design and related services.  <internetretailer.com>


Puma Names General Manager of International Footwear - PUMA announced that Mary Taylor has become the new General Manager of International Footwear effective Jan. 1, 2010. Based in Boston, she is responsible for the management of PUMA's footwear product design and development as well as product innovations in the sport performance and lifestyle ranges on a global level. Taylor reports directly to Melody Harris-Jensbach, Chief Product Officer of PUMA. Taylor has more than 20 years of experience in the footwear industry. Before PUMA, she was Chief Product and Marketing Officer at ONE7 LLC, a brand management company based in Boston, USA, where Taylor successfully re-launched global footwear product concepts and strategies. She also held senior positions with international brands such as Converse, Fila, Reebok and Keds/Stride Rite. <sportsonesource.com>


Bloomingdale's Outlets Said in the Works - Bloomingdale’s is pushing forward to launch outlets, according to sources, becoming a Johnny-come-lately into a potentially very lucrative channel of distribution for the department store chain. One real estate executive said Bloomingdale’s could be close to a deal with Simon Property Group Inc. to open several outlets around the country, taking a dramatic dive into the Simon-owned Mills properties, which typically comprise over 1 million square feet of gross leasable area and include traditional mall, outlet center and big box retailers and entertainment uses. In these sprawling centers, Simon has reclaimed some space from departing tenants, paving the way for Bloomingdale’s outlets, likely to be in the 30,000- to 40,000-square-foot range. Among the 16 Mills centers are Sawgrass Mills in Sunrise, Fla., Arizona Mills in Tempe, Ariz., and Potomac Mills in Woodbridge, Va. Bloomingdale’s declined to comment Tuesday on the strategy.  <wwd.com>


Sears Taps Wal-Mart Veteran James Haworth - Sears Holdings Corp. named James Haworth executive vice president and president of retail services, tapping an operations specialist who was widely reported to have been dismissed from Wal-Mart Stores Inc. in 2004 for violating unspecified “well-known company rules.” Haworth succeeds Kevin Holt, who is leaving the firm, and will oversee operations at Sears and Kmart and also serve on the internal holding company business unit board. He begins Jan. 31 and will report to the internal retail services board. Haworth spent two decades at Wal-Mart and was executive vice president and chief operating officer when he left under a cloud in December 2004. He founded a consulting firm the following year and most recently was chairman, president and chief executive officer of Chia Tai Enterprises International Ltd. & CP Lotus, an investment firm operating one-stop shopping centers in China.  <wwd.com>


Jones Apparel launches line for Kmart - Bristol Township’s Jones Apparel Group announced Tuesday its new GLO jeans line would be carried exclusively at Kmart stores starting this month. The GLO jeans collection targets teenage consumers and includes denim and non-denim bottoms, knit tops, woven tops and dresses. It will retail from $19.98 to $22.98 for basic denim, $26.99 to $29.99 for fashion denim and $19.99 to $21.99 for spring cropped pants. An national advertising campaign featuring ads in Seventeen magazine, People Style Watch magazine and various social networking and online initiatives will accompany the launch. <phillyburbs.com>


Ambani’s Retail Unit to Spend $87 Million on Footwear Stores - Reliance Retail Ltd., a unit of a company controlled by Asia’s richest man, plans to spend 4 billion rupees ($87 million) to add 100 outlets in India to sell branded footwear by Asics Corp., Stylo Plc and Adidas AG. Reliance Retail, today signed an agreement to sell Asics shoe brands including Gel-Kayano in its Reliance Footprint stores, the company said in a statement in Mumbai today. Mukesh Ambani’s retailing unit is tapping the $3.3 billion Indian footwear market forecast by the company to expand by a quarter as incomes rise in the world’s second-fastest growing economy. India’s growth may quicken to 10 percent in a “couple of years,” Kaushik Basu, chief economic adviser at the finance ministry, said on Jan. 4. <bloomberg.com>


2010 Must-Haves: What Consumers Want - Tech toys will be prominent on must-have lists at the dawn of the new decade. Hot new apps and mobile technologies were named by a handful of marketing experts — and close to 3,000 adults in a new Zogby Interactive poll — as things most desired to simplify lives, empower people and stay connected with others. These things “help people sift through a world when too much is available,” said John Zogby, chairman, president and chief executive officer of Zogby International. Asked to name one of 20 inventions or technological developments they could not live without, 2,841 adults polled Dec. 28 to 30 ranked high-speed Internet access as number one, followed by e-mail, Google, computer laptops/Netbooks and digital video recorders/TiVo. Spending more time online communicating via e-mail, social networks and video sites, Zogby said, is resulting in a “redefinition of peer groups — tribes of like-minded people who are becoming more important than any single demographic, like age and religion,” to marketers, among others. <wwd.com>


Challenge for 2010: Consumers Choosing Simplicity - This will be a year of living without. The U.S. is heading in that direction, marketing experts said. Brands face the challenge of consumers now accustomed to doing without things they once considered essential: attending a concert or sports event, dining out regularly, buying a new car when an old one was still running, and buying premium liquor or a status handbag.  In short, the country’s long-running, pre-recession spending spree isn’t likely to resume anytime soon. Consumers are expected to stay focused on buying fewer, more important things, in a time of the “anti-big” — a period in which they are redefining what they value, engaging in more local activities and spending more time at home with friends and family. A Zogby Interactive poll of 2,841 adults taken Dec. 28 to 30 found 40 percent of Americans anticipate having less disposable income at the end of this year than they did at year-end 2009, while one-third foresee having about the same amount in their coffers.  <wwd.com>

dering that the economy continues to lose jobs. <gallup.com>

Learning From Mr. Macro Market

“Learn all you can from the mistakes of others.  You won't have time to make them all yourself.”  
-Alfred Sheinwold
“Freddy” Sheinwold was born in London, emigrated to the US, and became one of America’s most famous bridge players. He was also a writer and, at one point during World War II, the Chief Code and Cipher Expert for the US Government.
Freddy learned that there is a lot to learn in terms of the ‘what not to do’s’ in both games and war. I have a great deal of respect for this approach to investing. That’s really what managing risk from a global macro perspective is all about.
Take, for instance, what’s happened to consensus expectations on Chinese growth and stock market returns in the last 24 hours. This is how Bloomberg news summarized why Chinese stocks got hammered overnight: “an unexpected shift by China’s central bank to restrain lending may foreshadow higher interest rates and a relaxation in the nation’s currency peg against the dollar.”
Obviously, those of you who have been going through your global macro paces for the last 6 weeks know that these proactive moves by the Chinese government are not “unexpected” at all. All you needed to have was a repeatable (daily) global macro process and you would have already positioned yourself for this. China explicitly told us they were going to tighten the screws on speculative investment. Making that call wasn’t rocket science.
Rocket science is what some investors consider their super special views on bottoms up investing. Sorry to break it to you Captain stock picker, but figuring out that a company is cheap with pending positive investment catalysts is something that all great investors should be able to do. If it was a God given talent set aside for a select few, why do we have so many money managers in this world purporting it to be their secret sauce?
I believe that you need to wake-up every morning with an all-star bottoms up investing process and a disciplined, but malleable, top down global macro risk management process to augment it.
Having been a “I know everything about this company” hedge fund Jedi of doing one-on-ones (I did over 256 of them in 2004) with corporate management teams, I have the perspective to tell you this because I have made plenty of mistakes. At least two-thirds of my company specific investment blowups have been due to missing Mr. Macro Market moves. That’s why I wake-up early every morning trying to stay one step ahead of the macro oriented mistakes of others.
China closed down -3.1% last night, taking the Shanghai Composite below its immediate term TRADE line of 3220. The Chinese have raised rates twice in the last 2 weeks and have now explicitly tightened the reserve requirements on their domestic backs to much higher levels than what you currently see here in the US banking system. China wants “quality” growth, not speculative levered-up growth.
On the heels of the unprepared reacting to the “unexpected”, the Hang Seng Index in Hong Kong broke its critical intermediate term TREND line of 21,829, closing down -2.6% on accelerating daily trading volume. Korea, Japan, and Indonesia saw their stock markets down in reaction to the wall of China worry, trading down -1.6%, -1.3%, and -1%, respectively.
The New Reality remains. Mr. Macro Market waits for no one. Global markets are increasingly interconnected and demand that money managers learn from the mistakes implied by consensus not having a global risk management process.
Another major global macro risk that continues to weigh on my mind is sovereign debt. I touched on this yesterday, so here’s the update. Indonesia tried to plug the market with $4B in debt yesterday, and the demand was only there to get half of that done. So the government issued $2B in 10-year sovereign notes at 6%. That’s +225 basis points higher than what He Who Sees No Inflation (Bernanke) is willing to issue prospective US Treasury investors on the same duration.
What a deal right? Since the beginning of 2010 we have now seen the Philippines, Mexico, Poland, Turkey, and Indonesia issue $10.86B in debt. To put that in context, that’s the highest level of debt issuance for emerging markets since the Tech bubble days of 1999. Again, I don’t think we have massive equity market bubbles in the world like we did in 2007, but we definitely have a Debtor Nation bubble.
As our mentor Herb Brooks beats into our thick hockey skulls, Again! Learn from other people’s mistakes. Nations piling debt upon sovereign debt is not new folks. Neither is Moody’s giving a country like Japan an absurd debt rating of Aa2 (their 3rd highest rating, whatever that is) when the they have pushed their debt balance over 200% of GDP. Players and pundits alike are constantly making macro mistakes in this game. Use that consensus backboard to your advantage.
My immediate term support and resistance lines for the SP500 are now 1118 and 1153, respectively. We were a buyer on weakness in US equities yesterday. We covered our short position in gold (GLD) on the biggest down day it’s had in 3 weeks. We remain out of China (and all emerging markets other than Brazil), for now.
Best of luck out there today,

XLK – SPDR Technology
Buying back Tech after a healthy 2-day pullback. Next to Healthcare, this remains our favorite sector in the SP500.

UUP – PowerShares US Dollar Index Fund
We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

XLV – SPDR Healthcare
Buying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.

VXX - iPath S&P500 Volatility The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.

EWG - iShares Germany Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

CYB - WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

FXE – CurrencyShares EuroWe shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.

EWJ - iShares Japan
While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

SHY - iShares 1-3 Year Treasury Bonds
If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

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Yesterday, all of the major indexes posted their biggest one-day losses for 2010 on accelerating volume.  The Hedgeye Risk Management models are still showing that the TRADE and TREND for the S&P 500 is BULLISH, while the Utilities (XLU) is the only sector to be broken on TRADE.


We woke up to another round of the Chinese withdrawing stimulus yesterday, which contributed to markets posting their biggest one-day losses in 2010.  Also, the People’s Bank of China raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting Jan. 18.




On the MACRO front it was another quiet day which means there are no vapors to help push the RECOVERY trade higher.  The VIX also had its biggest one day move in 2010 rising 3.9%.  With the VIX down 15.8% so far in 2010, investor complacency has crept into the market.  The Chinese can clear that up quickly if you are not paying attention. 


The best performing sector yesterday was the Consumer Staples (XLP).  The grocers and food stocks were the bright spot in the staples after the Q3 earnings beat and upwardly revised guidance from SVU and KFT.   HSY was the best performing packaged food stock on reports that Ferrero ended talks with the company regarding a rival bid for Cadbury.


Yesterday in the US the Materials (XLB) was the worst performer.  The XLB is one of the sectors with the most leverage to the recovery trade, as the CHINESE OX IN A BOX theme will work against the XLB.  In addition, aluminum stocks were hit hard in the wake of the earnings miss from AA.  The fertilizer, steel and precious metals stocks all finished lower on the day. 


The Financials have seemed to run into a brick wall on the back of increased regulatory concerns.  The renewed regulatory concerns were grounded amid reports that the Obama administration is considering assessing some kind of tax on banks to help close the budget deficit and recoup TARP losses.  The banking group finished lower for just the second time this year, with the BKX down 1.7% on the day.  Within the XLF, the large-cap names BAC, C, WFC and JPM were among the worst performers.  The weakness in the XLF also included the brokers, with MS down 2.84% and GS down 2.18%, the latter of which finished down for a third straight day.


The Technology (XLK) underperformed the S&P 500 by 20bps, as the SEMI stocks weighed heavily on the sector with the SOX down 3.59%.  The SOX suffered its biggest one-day pullback since 10/1/09. 


As we wrote about yesterday, living up to expectation is difficult to do.  The selloff in the SOX might be discounting that the stocks are already pricing in upside to current December quarter earnings season.  Outside of the semis, ERTS declined 7.8% after the company's disappointing Q3 pre-announcement and decreased full-year guidance.


The range for the S&P 500 is 35 points or 1.5% (1,153) upside and 1.5% (1,118) downside.  At the time of writing the major market futures are trading up slightly.    


Yesterday the CRB declined 1.68% on the back of the Grains and Energy.  The soft commodities Orange juice, Sugar and Coffee were the best performing on the day.   


In early trading today Copper is trading near a two week low on the back of the news out of China.    The Hedgeye Quant models have the following levels for COPPER – buy Trade (3.26) and Sell Trade (3.49).


Yesterday, gold declined by 1.9%, its biggest drop since 12/17/09.     The Hedgeye Quant models have the following levels for GOLD – buy Trade (1,123) and Sell Trade (1,160).


In early trading Crude oil is trading down for the third day in a row.   The Hedgeye Quant models have the following levels for OIL – buy Trade (78.88) and Sell Trade (84.28).


Howard Penney

Managing Director















The Macau Metro Monitor.  January 13th 2009.



NON-STOP WUHAN-MACAU SERVICE chinaeconomicreview.com

Air China will fly between Wuhan and Macau four times a week, starting January 15th.  It will operate an Airbus A320 aircraft on the route.


Yeah the hold percentage was a touch higher than last year and some of October’s slot revenue were included in November, but this was a pretty good month for the Strip.



The state of Nevada released a shocker today.  Strip gaming revenues increased 8.3%.  Digging deeper into the numbers, it is clear that the quality of the numbers was less than the headline would indicate.  Nevertheless, November was a pretty good month for the Strip considering the environment and recent trends. 


The Baccarat business continues to shine.  Despite a huge Macau market in their backyard, the Asians keep coming to Las Vegas.  Strip Baccarat revenue increased 136% y-o-y in November.  A higher hold percentage certainly contributed but Baccarat drop still increased 84%.  The following chart shows the fairly consistent outperformance of the Baccarat segment.




Pardon the pessimism – this was a good month after all – but there is still plenty of evidence of softness.  The following chart shows year-over-year growth a few different ways.  As we indicated, total Strip revenue increased 8.3%.  However, the casinos played a little luckier so if you use a constant hold percentage, Strip revenues would’ve only increased 2.5%.  Since Baccarat was so strong and can be very volatile month to month, we show revenue excluding that segment which actually declined 4.3%.  Finally, excluding Baccarat and adjusting the hold percentage yields a revenue decline of 10.7%. 




The Baccarat performance is encouraging but we’d feel better if the improving trend was more broad based.

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