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TWO YEAR REVPAR TRENDS

With very easy year-over-year comps, we thought it would be instructive to look at 2 year comps as a gauge of the underlying trends.

 

 

It is no secret that RevPAR has been getting less bad.  Certainly, lodging stocks seem to reflect that trend.  It remains to be seen, however, whether the underyling demand is actually getting stronger sequentially.  Year-over-year comps are very easy.

 

The following chart tracks RevPAR, occupancy, and average daily rate on a two year comp basis.  Here, the trends are not so conclusive.  On the one hand, occupancy looks like it is on an upward trajectory.  However, the ADR trend is negative and RevPAR may be as well.  Certainly, the recent 3 week moving averages are not comforting, not even occupancy.  In fact, on a two year basis, weekly RevPAR declines eclipsed 30% in two out of the last three weeks and three out of the last seven.  Even on a one year comp basis, the the slope of the moving averages has turned down.  The coming weeks should be enlightening. 

 

TWO YEAR REVPAR TRENDS - lodging metrics 2yr 1.14


WE'RE NOW 1.8 MONTHS FROM A BIG TAILWIND FOR CONSUMER LENDERS

 

Our Financials Sector Head Josh Steiner looks at the relationship between initial unemployment claims and the unemployment rate:

 

The 444k initial unemployment claims figure this morning was up 11k from 433k last week (revised down 1k from 434k).

 

As such, the 4-week rolling average claims improved this week to 441k from 450k last week - an improvement of 9k, well ahead of the slope of 5.4k/week since March (9 months of data).

 

WE'RE NOW 1.8 MONTHS FROM A BIG TAILWIND FOR CONSUMER LENDERS - js1

 

The following chart shows why this metric is important to track.Over the last 20 years, unemployment begins falling in earnest once rolling claims break into the 375-400k range. At the 9-month trajectory of -24k/month we are 1.8 months away from 400k and 2.7 months away from 375k. As such, by the March/April timeframe we should be at a level where unemployment begins to fall steadily, which will put a long-term tailwind behind consumer lenders.

 

WE'RE NOW 1.8 MONTHS FROM A BIG TAILWIND FOR CONSUMER LENDERS - js2

 

For those wondering how to interpret a possible inflection in rolling claims should we see one in late January/February, we would suggest using a positive slope of 7.2k/week as an outer risk band. This is the fastest weekly rate at which rolling claims increased over a two week period since the trend of improvement began in March. Alternatively, in the absolute, one can use 475-480k as a near-term rolling upper limit based on the downward channel that's been in place since March.

 

Joshua Steiner, CFA

Financials


The Levy

“Drove my Chevy to the levy but the levy was dry

And them good 'ole boys were drinking whiskey and rye singin . . . ”

-Don McLean, American Pie

 

Our Financials Sector Head Josh Steiner had some insightful comments this morning on President Obama’s proposed bail-out levy on banks.  The idea of a levy made me think of Don McLean’s well known song, American Pie.  In contrast to the levy in that song, the Investment Banking Levy, is far from dry.

 

In fact, President Obama believes that he can raise ~$90BN from the Investment Banking Levy. The proposal is a 15 basis point, or 0.15 percent, charge on the excess liabilities of large institutions and would apply only to the those institutions with assets of more than $50BN. 

 

The levy is not a very egalitarian sharing of the monies still owed under TARP.  Obviously some banks borrowed less, paid back all they borrowed and so forth.  Also, other sectors, like the auto sector borrowed money and will not be subject to the Levy.  Regardless of whether it is fair, this could actually help President Obama on a number of levels.  First, it is $90BN that can be used against the deficit, which is a positive for the fiscal health of the United States. Second, the inordinate executive compensation of the large banks is a populist rally cry.  So to the extent that the masses are against gross and indulgent pay for bankers, this will improve President Obama’s approval rating on the margin, which obviously needs some help.

 

According to the most recent Real Clear Poll aggregate, President Obama’s approval rating is 47.7 percent, which is the lowest of his Presidency.  This is consistent with the Rasmussen Daily Tracking poll in which only 25% Strongly Approve and 46% Totally Approve of President Obama.  On the Ramussen Poll, these numbers are effectively the lowest of his Presidency.

 

While the Investment Banking Levy may help on the margin, clearly President Obama and the Democrats are looking at a potential world of electoral hurt heading into the midterms.  We are in the middle of creating our internal projections on the upcoming midterms, but President Obama’s approval is a sufficient leading indicator to suggest the direction of political power will shift in the United States Congress.

 

Currently, the most closely watched race is for Senator Ted Kennedy’s former seat in the Commonwealth of Massachusetts.  Recent polls are all over the map, with Democrat Coakley ahead by anywhere from 15 points to Republican Scott Brown ahead by one point.  A win for Brown would not only shift the power in the Senate, it would also be a dark omen for the Democrats’ chances of holding ground in the midterms.  In fact, even a close race in this liberal bastion is likely a bad sign.

 

Ultimately, the Democrats will likely retain the seat, but on some level it is hard to argue with Scott Brown when he responded to a question on CNN yesterday about sitting in the late Ted Kennedy’s seat:

 

“Well, with all due respect, it’s not Ted Kennedy's seat, and it’s not the Democrats’ seat, it’s the people’s seat.”

 

Indeed.

 

 

Daryl G. Jones
Managing Director

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

1Q10 THEME: BUCK BREAKOUT

As it relates to our stance on the US Dollar, we started out 2009 with the theme “BREAKING THE BUCK” and ended the year with the “BOMBED OUT BUCK”, which focused on the bottoming-out process for the Dollar.  For 1Q10, we are now BULLISH on the dollar; hence we’ve named one of our major themes for this quarter, “BUCK BREAKOUT.” 

 

In the last weeks Keith has made it abundantly clear that while the inverse correlation between the SP500 and the US Dollar that we pick up on in February of 2009 (see our note to President Obama from 2/24/09 titled, “Breaking The Buck) held for the balance of much of the year with a high R-squared, correlations are not perpetual, especially when they become consensus. 

 

On January 4, 2010 we bought the US Dollar via the etf UUP in our model portfolio, a position anchored on our belief that despite Federal Reserve Ben Bernanke’s current strangle hold on interest rates, even “He Who Sees No Bubbles” (Bernanke) will have to signal an end to “extended and exceptionally” low interest rates because the economic forecast embedded in that view is simply unreasonable and unsustainable: US inflation continues to break out (the latest CPI reading was 1.8% Y/Y) and we expect this number to climb when December CPI is released on Friday.

 

Our bet is that raising rates should translate into the citizenry earning a higher rate of return on their savings and a flight by investors to the US Dollar as a safe haven. From a macro perspective, we think this aligns well with recent economic and political developments shaking global markets. The debt leverage and balance sheet issues associated with countries like Greece and Dubai continue to make headlines. As such issues persist (for example we continue to see a negative correlation with ME markets and the price of oil), we see the USD as attractive on a relative basis.

 

To substantiate our conviction on the Greenback, we shorted the Euro versus the USD via the etf FXE on 1/11/10. Additionally, our call that Chinese growth will slow in 1H10 (for more see our post on 1/13, Chinese Ox in a Box), should be bullish for the USD on the margin.

 

On the intermediate term TREND (3 months or more) we are bullish on the USD.  The TREND line for the Dollar Index is 76.24, which we’re comfortably above, with TAIL resistance up at 80.29. Since the beginning of December, the US Dollar Index is up 2.8%.

 

Matthew Hedrick
Analyst

 

1Q10 THEME: BUCK BREAKOUT - USDSIGN

 


QSR - DON'T MESS WITH MACRO

A sustained recovery in QSR stocks will be dependent upon macro headwinds abating and same-store sales picking up.


 

Almost without exception, QSR companies presenting at the Cowen and Company conference outlined their strategies along the lines of “strengthening the brand, using product innovation to drive traffic, and increasing financial flexibility”.  While we anticipated that the timing of the conference would lead to more qualitative than quantitative commentary, there were some interesting discussions about the current macro backdrop, with regard to regional performance (Texas, in particular) and the impact of rising unemployment.

 

During the JACK presentation, Chairman and CEO Linda Lang stated that unemployment was the primary macroeconomic issue impacting their business.  She pointed out that Texas, California, and Nevada have seen adverse economic trends of late, with unemployment among the young (especially Hispanics and males) being a particularly acute problem.  While 16-19 year olds are a key customer base for all QSR concepts, Lang admitted that JACK’s customer base skews at least one-third more Hispanic than major competing QSR chains.  The chart below illustrates the unemployment picture for young Hispanics. 

 

QSR - DON'T MESS WITH MACRO - hispanics 16.19

 

This group is also a vital source of business for TAST; the company hinges much of its future growth strategy on its Hispanic brand restaurants, “Pollo Tropical” and “Taco Cabana”.  During the Carrols presentation at the Cowen and Company conference, Chairman of the Board and CEO Alan Vituli’s presentation discusses how the company is “well positioned to capitalize on growing Hispanic trends” such as Hispanic population growth and Hispanic disposable income being “projected to rise to $1.4 trillion by 2013 (+8% CAGR from 1990)”.  The source for the disposable income statistic is cited as “Article appearing in the third quarter 2008 edition of ‘Georgia Business and Economic Conditions’, a publication of the Terry College of Business, The University of Georgia.”  We are going to make a wild assumption that this study was put together before the third quarter, when the economic landscape of America changed drastically.  While Hispanic disposable income will undoubtedly grow over the long term, the unemployment picture among young Hispanics is far more relevant than the stale statistic cited by TAST’s presentation.

 

Some 27% of JACK’s system units, and 30% of company units, are in Texas.   Other QSR companies with significant exposure to Texas include TAST and SONC.  Consumer spending has fallen in step with unemployment rising and this is reflected in the second chart below showing sales tax data for the Dallas metropolitan area.  Trends in the Houston, San Antonio, and Austin metropolitan areas are almost identical.

 

QSR - DON'T MESS WITH MACRO - dallas

 

For QSR in general, however, unemployment is a national issue and it is adversely affecting traffic in all areas of the country.  A sustained recover in QSR stocks will be dependent upon macro headwinds abating and same-store sales picking up.  As we wrote about in “I’LL HAVE ONE JOB, HOLD THE BURGER”, on 01/08/10, the 16-19 year old demographic is extremely important for QSR chains.  The chart below shows the high rate at which this age group is losing jobs. 

 

QSR - DON'T MESS WITH MACRO - 16.19 total

 

 

We also noted that several of the management teams that presented at the conference are projecting flat operating margins going forward despite their expectations for continued softness in top-line trends, which led me to consider another important employment-related issue for restaurant operators.   In the event of the Employee Free Choice Act passing this year, labor costs would increase materially.  We did not hear any QSR management teams discuss this topic during presentations this week.  Unions are disappointed over the public option and with politicians needing campaign help, we could hear more about unionization in the coming months ahead of 2010 mid-terms. 

 

Hedgeye Risk Management’s Macro and Healthcare sectors have been monitoring the theme of unionization closely.  This is a highly relevant topic for QSR companies.  For instance, McDonalds employs more than 600,000 U.S. restaurant workers, many earning less than $10 per hour.  This makes the chain an attractive target for union organizers, a point McDonald’s recently elected President and COO Don Thompson was apparently aware of when he urged 2,400 franchisees to write to their US senators and representatives to oppose the Employee Free Choice Act, which would effectively end secret ballots and lead to binding arbitration for labor contracts.   Rick Berman, a lobbyist for the food industry in Washington, D.C., says that the bill is “a huge threat to fast food and … the long-term health of the industry”. 


R3: Observations from ICR (literally)

R3: REQUIRED RETAIL READING

January 14, 2009

 

With day 1 complete, there are a handful of observations and highlights worthy of passing along from the 12th annual ICR Exchange.

 

 

TODAY’S CALL OUT

 

With day 1 complete from the annual ICR Exchange, the following is a handful of first-hand observations:

 

  • Take it as a sign that the market is back, people are just plain sick of the cold weather, or the interest in retail, apparel, and restaurants is at peak levels. The conference is PACKED! There are likely several hundred attendees including investment bankers, sell-side analysts, investors, company managements, and institutional salesmen.
  • “Banker Bonanza” observed first hand. The conference literature includes 12 profiles of investment banks, each touting their expertise in consumer-sector transactions. Word has it there has been a full schedule of “one-on-ones” between the banking teams and company managements. Attendance at the “private day” on Tuesday was also sizable.
  • Standing room only at “breakout” tables for: JCG, CROX, AEO, DECK, RUE, GES, PLCE, and LULU
  • Empty “breakout” table of the day award: GOLF
  • Most talked about presentation: Rue 21. Management’s opening comments about Rue’s post-IPO stock performance and market-cap growth takes self-promotion to a new level. There is likely still near-term upside given the hyper square footage growth and related comp benefits coming from a young store base. However, there is a high degree of skepticism surrounding the company’s 1500 store goal and sustainability of same store sales if the economy actually improves.
  • Quote highlights:
    • “We’re in the pop culture business” –Mickey Drexler, J Crew
    • “When I was asked if we were ready to go public, I said, why not?” – Bob Fisch, Rue 21
    • “We’re working to become a shoe company that retailers can deal with in a normal way” –John Duerden, Crocs
    • “Aerie inventory is a little rich” –Joan Hilson, American Eagle Outfitters
    • “You gotta throw last year away” -Jim O'Donnell, American Eagle Outfitters
    • “We can play in any mall in the country.”  -Aeropostale
  • Mark your calendars for a March update on the fate of AEO’s Martin & Osa concept. Based on management comments, it now seems likely that the company will put an end to developing the 28 store, money-losing concept. Management was up front that the progress here is just not where it needs to be and a decision will now be made as to whether or not the company will continue to run the division.
  • Deckers updated its longer-term sales goals, raising the forecast for UGG’s to $900 million in 2012 from $750 million. 30% of sales will be international, which still seems low given the limited penetration in key markets such as Japan and Germany.
  • While the mood is decidedly more upbeat across the board (vs. last year), there is still a consistent undertone of caution from most management teams. Even with better 4Q results, extrapolation into 1Q is absent. Tight inventory management remains a key focus for 2010 and barely any presentation suggested inventory growth was a key factor in driving sales. Macro has been notably absent from most discussions, with management’s refraining from assessing the state (or fate) of the consumer.

 

MORNING NEWS 

 

Firms Like Gildan Activewear Inc.Take Stock After Haiti Earthquake - Apparel companies assessed the situation on the ground in Haiti on Wednesday after the devastating earthquake on Tuesday that killed thousands of people and crippled the Caribbean nation. The American Apparel & Footwear Association and the U.S. Association of Importers of Textiles & Apparel said they had reached out to members doing business in Haiti and would continue to do so as the situation evolved. The AAFA Apparel Foundation, the group’s charitable arm, began coordinating with disaster relief organizations on Wednesday to offer assistance. Allan Ellinger chairman of the Fashion Delivers Foundation, has put out a call for donated women’s and men’s clothing, as well as sheets, throws and blankets. Gildan Activewear Inc. said it would move some of its manufacturing operations to Central America after the earthquake in Haiti damaged one of its subcontractor’s factories. The Montreal-based company, which manufactures T-shirts, socks and underwear, said one of three factories that sews fabric for Gildan suffered substantial damage during Tuesday’s quake. Gildan said it would shift production of the shirts destined for the U.S. screen-print market to the Dominican Republic, Honduras and Nicaragua. The company said its U.S. retail customers will not be affected.  <wwd.com>

 

L Capital Takes Stake in Italian Brand Dondup - L Capital, the private equity arm of LVMH Moët Hennessy Louis Vuitton, said Wednesday it has taken a 40 percent stake in Italian apparel and denim brand Dondup for 30 million euros, or $43.3 million at current exchange. This confirms a WWD report in September. The brand’s founders, husband-and-wife team Massimo Berloni and designer Manuela Mariotti, hold the remaining shares, with four minor partners. Through the agreement with L Capital, Dondup chief executive officer Berloni said he planned to expand the brand’s business internationally. Dondup reported sales of about 60 million euros, or $83.4 million at average exchange, last year and Italy accounted for 80 percent of the business. Berloni said he was “less attracted by emerging markets that show a more immediate boost and more by those that may be tougher, but will allow a more solid growth and a serious presence in Europe,” citing Germany, France and the U.K. as examples.  <wwd.com>

 

Kaberuka Sees Production Opportunities in Africa - Africa may be an alternative for textiles and apparel manufacturers that are paying higher labor costs in China and other newly industrialized nations, a top African banker said. Donald Kaberuka, president of the 53-nation African Development Bank, which seeks to promote economic and social development on the continent, said at the bank’s Eminent Speakers Program here that the higher wages have already caused some Chinese industries to relocate to Southeast Asian nations such as Cambodia and Laos. Speaking with a group of visiting foreign reporters, Kaberuka said he expects some relocations for textiles and apparel industries “could be on the African continent.” He plans to visit Beijing next month in an effort to ensure “that some of this manufacturing capacity comes to Africa.” However, Kaberuka, a former minister of finance in Rwanda, said big outlays would be needed to improve core infrastructure such as roads, ports and public utilities.  <wwd.com>

 

Wet Seal expands its mobile channel with an m-commerce site - When your demographic is 15- to 25-year-old females, the kind of consumer who is connected to her mobile phone 24/7, mobile commerce is a good bet, many experts say. That’s what The Wet Seal has concluded, and it’s expanding its mobile offerings as a result. The multichannel retailer has launched a mobile-optimized version of its e-commerce site; consumers enter the e-commerce URL on their mobile phones and are automatically redirected to the m-commerce site. The site joins a mobile app and text messaging program.  <internetretailer.com>

 

Coach Opening Shanghai Flagship - Coach Inc. is affirming its presence in China and growing aggressively throughout the Far East. The $3.2 billion American accessories giant will open a 7,000-square-foot flagship in Shanghai in April. The New York-based firm, which has 343 full-price boutiques and 118 factory outlet stores in North America, and about 160 locations in Japan, has accelerated its original plan for China and is opening 15 locations this year. By June 30, the end of the firm’s fiscal year, there will be 43 units throughout Mainland China and its special administrative districts of Hong Kong and Macau. <wwd.com>

 

ID Wholesaler.com conjures up a newly designed web store - A new redesign and e-commerce platform helped online photo identification products retailer ID Wholesaler grow annual web sales by about 7.3% to $17.5 million in 2009 from $16.3 million in 2008. In August, ID Wholesaler worked with web site design firm Fuze LLC to update its e-commerce site with cleaner pages, guided navigation and bigger images. The new design also features a navigation bar on the top of the home page and other pages that highlights the site’s core product categories such as printers, photo identification systems and related supplies.  <internetretailer.com>

 

ShoeMall.com adds products and tweaks its site to drive a sales turnaround - After a rocky beginning to the year, Shoemall.com ended 2009 with record-breaking online sales during the holiday shopping season. Shoemall.com recorded a 148% boost in online sales on the Friday after Thanksgiving from the same Friday the year before, its highest sales on that Friday. In December, online sales increased 30% from December 2008. The company ended the year with $90 million in online sales, a 3% decline from $92.9 million in 2008. Bresina credits the addition of two new product lines on its site—children’s footwear and accessories such as handbags, scarves and hats—with improving sales during the course of the year. <internetretailer.com>

 

Intermix Changes With the Times - The 23-unit national specialty store retailer — known best for its extensive mix of both established and emerging designer brands including Stella McCartney, Elizabeth and James, Balmain, J Brand, ALC by Andrea Lieberman, Chloé, Rag & Bone and Proenza Schouler — has entered 2010 with a new buying and merchandising strategy and several other developments. These moves — including everything from shutting several under-performing units (Charlotte, N.C., closed this week and Orlando, Fla., shuttered a few months ago) to launching a redesigned, more sophisticated logo and new store environment — come after a rough few years in the retail arena. With that said, Khajak Keledjian, chief executive officer and co-founder of Intermix, said he has seen single-digit comp-store sales increases year after year, even during the recession. He claims this is because of Intermix’s unusual “mom-and-pop feeling” in each of the stores, where customers feel as though they are shopping in an environment which is unique to their specific neighborhood, allowing them to purchase special, not mass-produced, items.  <wwd.com>

 

On top of credit score, retail credit lines now ask for income, asset data - Consumers will have to divulge more personal information to apply for store credit cards -- possibly putting the brakes on so-called instant credit -- under sweeping industry reforms finalized by the Federal Reserve on Tuesday. The measure, which takes effect on Feb. 22, requires all credit card issuers to consider shoppers' income and ability to pay before granting approval for a card. The rule aims to tighten the lax lending standards that helped fuel the financial crisis. Retailers say the new measure could disrupt popular promotions that incentivize shoppers, such as discounts for opening a credit card. Typically, retailers quickly approve new accounts based on customers' credit scores. The new regulations require that they also consider shoppers' income and assets.  <washingtonpost.com>

 

Supreme Court Hears NFL Licensing Case - Exclusive licensing agreements between apparel makers and professional sports leagues were put to the test on Wednesday as the Supreme Court considered arguments in an antitrust case that could have significant ramifications for the industry. The crux of the case before the high court is whether the National Football League acts as a single entity that can collectively enter into exclusive licensing deals for apparel products and is immune from antitrust laws or whether it is a collection of independently owned businesses and therefore subject to antitrust laws that prohibit price fixing and monopolies. The case involves American Needle Inc., a manufacturer based in Buffalo Grove, Ill., which sued the NFL, National Football League Properties, 30 of its 32 teams and Reebok International in 2004 alleging a violation of antitrust laws when the NFL entered into an exclusive, 10-year licensing deal with the activewear firm to produce headwear with NFL team logos in 2001.  <wwd.com>

 

House Committee Passes Bill on Pricing Agreements - The House Judiciary Committee approved a bill Wednesday that would overturn a Supreme Court decision giving apparel brands the ability to set minimum prices. In a landmark case in 2007, the Supreme Court struck down a 96-year-old legislative ban on minimum pricing agreements, giving apparel brands the potential to enforce the lowest price at which their products could be sold.  In effect, the ruling allowed manufacturers to potentially restrict how much a retailer can discount a product, creating challenges for off-pricers, Internet retailers and other discounters. The decision gave lower courts the flexibility to determine, on a case-by-case basis, whether minimum pricing agreements are anticompetitive based on several factors. Previously, such agreements were illegal on their face.  Watched closely by the fashion industry, the Supreme Court case pitted Leegin Creative Leather Products against PSKS Inc., which operated the Kay’s Kloset boutique in a Dallas suburb. The court sided with Leegin.  <wwd.com>

 

E-retailers sold more items at full price, boosting December profits - Web sales grew 18% in December compared with December 2008 and profits increased by 20% as e-retailers sold more products at full price after a year of luring consumers with heavy discounts, according to a monthly study of 150 e-retailer clients of MyBuys Inc. that the personalization technology firm provides exclusively to Internet Retailer. Total revenue from items sold at list price increased nearly 30% in December, MyBuys says. Meanwhile, revenue generated by sales of discounted items increased by 19%, down substantially from the 100%-200% increases in sales of discounted items earlier in the year, the study shows. While revenue growth from discounting was substantially smaller than prior months, the average discount offered increased by 5%, growing from 25.3% in December 2008 to 26.6% in December 2009.  <internetretailer.com>


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